Story 1: The Illegal Alien Family That Is Deported Together Stays Together — Let The “Dreamers” Go Back To Their Country of Origin With Families– Enforce All Immigration Laws — Remove and Deport The 30-60 Million Illegal Aliens Who Invaded The United States in Last 20 Years — No DACA Fix Needed — Trump Will Lose Many of His Supporters If He Gives Amnesty or Citizenship To Dreamers — Video —

Story 1: More on Moore: Roy Moore’s Attorney News Briefing — She Said Vs. He Said — Faulty Memory of Witnesses Leading To Wrongful Conviction — Sexual Abuse — Who Do You Believe? — The Voters of Alabama Must Answer This Question on December 12 — Videos —

Story 3: Who is on the Congressional CREEP List of Sexual Harassers in Congress and Their Staffs ? — Who is next to be outed? — Shout Animal House — Intimacy — Getting To Know You– Dance With Me –Videos

Story 2: Trial Balloon of Having Sessions Return To The Senate By Write In Campaign Shot Down By Attorney General Jeff Sessions — Political Elitist Establishment Trying To Overturn Alabama Voters — Videos —

Story 3: Attorney General Sessions Grilled By House Including Whether There Will Special Counsel For Hillary Clinton Alleged Crimes — Vidoes —

Story 4: Sexual Harassment in The Senate and House — Time To Expose the Exposers — Out Them By Naming Them — Publish The Creep List — Videos

Story 3: Let Voters of Alabama Decide Who They Want For Their Senator — Alabama Republican Senate Candidate, Roy Moore, Denies Accusations Made in Washington Post Attack Article vs. Democratic Senate Candidate, Doug Jones, Supporter for Pro Abortion Planned Parenthood and Women Should Have The Right To Choose Killing Their Babies in The Womb — Denies Civil Rights Protection of Life To Babies Before Birth — Videos

Story 4: Remembering The Veterans in Music — Lili Marleen — We’ll Meet Again — Sky Pilot — We Gotta Get Out Of This Place — Paint it Black – – War — Where Have All the Flowers Gone? — Blowing In The Wind –Videos

Story 1: President Trump’s Address to South Korea’s National Assembly — Great Speech — Americans and Koreans Loved It — Every Breath You Take — Videos —

Story 2: President Trump Tells It Like It Is — Does Not Blame China For Hugh Trade Deficits But Past Administrations — Videos —

Story 3: Republican Party Senate Bill Wants To Delay Tax Cuts To 2019 Instead of Cutting Spending Now — Need New Political Party Advocating Balanced Budgets, Broad Based Consumption Tax,and Term Limits — Voters Will Stay Home Election Day, November 6, 2018 If Congress Does Not Completely Repeal Obamacare and Enact Fundamental Reform of Tax System — Videos —

Story 1: Communist Chinese Connection To Trade — Nuclear Proliferation — and — Terrorism (TNT) — Peace or War — China Must Destroy North Korea Nuclear Weapons and Missiles or Face The Consequences of Overthrow of Communist Party — U.S.Complete Embargo on All Chinese Trade and Investment —
Story 2: President Trump Meets With Japanese Prime Minster Shinzo Abe and President Moon Jai-in As U.S. Navy Flexes Air Power — All Options Are On The Table — Video —

Story 3: Saudi Arab On The Brink of War With Lebanon Controlled By Iran-backed Lebanese Shi‘ite group Hezbollah — Saudi Arab Blames Iran For Yemen Missile Attack — Purge and Roundup of Royal Prince Continues — Videos —

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Story 1: Democrats (Liberal, Progressive & Socialist Wing) and Republicans (Liberal & Progressive Wing) of The Two Party Tyranny Are All Marxist Now — Big Government Bubble Tax Surcharge of 6% Increases Rate From 39.6% to 45.6% — Class Warfare — Eat The Rich — Videos — Part 2 of 2 —

Story 2: Republican Tax Cut Will Not Make America Great Again — Missing Is Real Government Spending Cuts That Results in A Balanced Budget By 2020 or 2024 — Spending Addiction Disorder (SAD) or Government Spending Obesity — Alive and Well — Videos —

Story 3: A Broad Based Consumption Tax Replacing The Current U.S. Income Tax System Along The Lines of The FairTax or Fair Tax Less With Generous Monthly Tax Prebates and Limiting Federal Government Expenditures to 90% of Taxes Collected Will Make America Great Again — Videos

Part 1 of 2 — Story 2: No Tax Reform By Changing From Income Tax System to Broad Based Consumption Tax — The FairTax or Fair Tax Less — No Middle Class Tax Relief From Payroll Taxes — No Real Cuts in Federal Spending As Budget Deficits Rise with Rising National Debt and Unfunded Liabilities — Spending Addiction Disorder — Government Obesity — Crash Diet of Balanced Budgets Required — Videos

Story 1: Update of Radical Islamic Terrorist Jihadist Attack in New York City — President Trump “Send Him To Gitmo” as Enemy Combatant and Get Rid of Chain Migration and Diversity Lottery Immigration Program and Replace With Merit Based System of Immigration — Videos — Breaking —

Story 2: The Democratic and Republican Party Failure To Completely Repeal Obamacare Including Repealing The Patient Protection and Affordable Care Act (ACA) and All Related Mandates, Regulations, Taxes, Spending and Subsidies — Obamacare Collapsing — Replace Obamacare With Free Enterprise Market Capitalism Health Insurance — Keep The Federal Government Out Of The Health Insurance and Health Care Business — Videos —

Story 3: Obama’s Secret Surveillance Spy State Scandal — Misuse of Intelligence Community For Political Purposes — Gross Abuse of Power and Political Conspiracy — Violation of Fourth Amendment — Videos —

Story 1: President Trump Signs Executive Order Targeting Institutions and People Doing Business With North Korea — Communist China Trades With and Enabled North Korea Nuclear Weapon and Missile Programs — Waiting For Embargo Banning All Trade and Investment in Communist China — Videos —

Story 2: Fed To Start Quantitative Tightening In October 2017 by Selling Some ($10 Billion Per Month or $120 Billion Per Year) of $4,500 Billion Bond Portfolio As U.S. Economy Slows in 2017? — Videos

Story 4: Illegal Aliens Shout Down House Minority Leader Nancy Pelosi Calling Her A Liar — When Will American Citizens Shout Down President Trump Calling Him A Liar? … President Trump and Republican Party Want Touch Back Amnesty and Pathway to Citizenship For Illegal Aliens — Majority of American People Want All Immigration Laws Enforced — Deport and Remove All 30-60 Million Illegal Aliens In United States To Country of Origin — No Republican Re-importing of Illegal Aliens With Expedited Visas and Touch Back Amnesty and Pathway to Citizenship — Employ American Citizens Not Illegal Aliens — Videos

Story 1: President Trump United Nations Speech Names North Korea and Iran As Threats to World Peace and Critical of Those Nations (China) Who Trade With Them –Totally Destroy North Korea And The Rocket Man Mr. Kim — Videos —

Story 1: Two Islamic Terrorists Arrested For London Train Attack — United Kingdom Threat Level Lowered From Critical To Severe — Elderly Couple Took In Several Hundred Forster Children Over The Years Including Two Suspected Terrorists — Trump: “Loser Terrorist” And “Sick And Demented” — 21-Year-Old Syrian Refugee Yahyah Farroukh Named Suspect — Videos —

Story 2: Trump Wants To Increase CIA Drone Attacks — Videos —

Story 3: Third Night Of Violence In St. Louis — Protesters And Vandals Damage Property With Over 120 Arrests And 11 Police Injured — Videos

Story 1: American Collectivism (Resistance Is Futile) Vs. American Individualism (I Have Not Yet Begun To Fight!) — Federal Income, Capital Gains, Payroll,Estate And Gift Taxes, Budget Deficits, National Debt, Unfunded Liabilities, Democratic And Republican Parties, Two Party Tyranny Of The Warfare And Welfare State And American Empire Are The Past — The Future Is Fair Tax Less, Surplus Budgets, No Debts, No Unfunded Liabilities, And American Independence Party With A Peace And Prosperity Economy, Representative Constitutional American Republic Are The Future — Lead, Follow Or Get Out Of The Way — Those Without Power Cannot Defend Freedom — Videos

Early life

Erikson’s mother, Karla Abrahamsen, came from a prominent Jewish family in Copenhagen, Denmark. She was married to Jewish stockbroker Valdemar Isidor Salomonsen, but had been estranged from him for several months at the time Erik was conceived. Little is known about Erik’s biological father except that he was a Danish gentile. On discovering her pregnancy, Karla fled to Frankfurt am Main in Germany where Erik was born on June 15, 1902 and was given the surname Salomonsen.[4]

Following Erik’s birth, Karla trained to be a nurse and moved to Karlsruhe. In 1905 she married Erik’s Jewish pediatrician, Theodor Homberger. In 1908, Erik Salomonsen’s name was changed to Erik Homberger, and in 1911 Erik was officially adopted by his stepfather.[5]

The development of identity seems to have been one of Erikson’s greatest concerns in his own life as well as in his theory. As an older adult, he wrote about his adolescent “identity confusion” in his European days. “My identity confusion,” he wrote “[was at times on] the borderline between neurosis and adolescent psychosis.” Erikson’s daughter writes that her father’s “real psychoanalytic identity” was not established until he “replaced his stepfather’s surname [Homberger] with a name of his own invention [Erikson].”[6]

During his childhood and early adulthood he was known as Erik Homberger, and his parents kept the details of his birth a secret. He was a tall, blond, blue-eyed boy who was raised in the Jewish religion. At temple school, the kids teased him for being Nordic; at grammar school, they teased him for being Jewish.[7]

At Das Humanistische Gymnasium his main interests were art, history and languages, but he lacked interest in school and graduated without academic distinction.[8] After graduation, instead of attending medical school, as his stepfather had desired, he attended art school in Munich, but soon dropped out.

Uncertain about his vocation and his fit in society, Erikson began a lengthy period of roaming about Germany and Italy as a wandering artist with his childhood friend Peter Blos and others. During this period he continued to contend with questions about his father and competing ideas of ethnic, religious, and national identity.[7]

Psychoanalytic experience and training

When Erikson was twenty-five, his friend Peter Blos invited him to Vienna to tutor art at the small Burlingham-Rosenfeld School for children whose affluent parents were undergoing psychoanalysis by Sigmund Freud‘s daughter, Anna Freud.[7]

Anna noticed Erikson’s sensitivity to children at the school and encouraged him to study psychoanalysis at the Vienna Psychoanalytic Institute, where prominent analysts August Aichhorn, Heinz Hartmann and Paul Federn were among those who supervised his theoretical studies. He specialized in child analysis and underwent a training analysis with Anna Freud. Helene Deutsch and Edward Bibring supervised his initial treatment of an adult.[7]

In 1933 he received his diploma from the Vienna Psychoanalytic Institute. This and his Montessori diploma were to be Erikson’s only earned academic credentials for his life’s work.

United States

In 1931 Erikson married Joan Mowat Serson, a Canadian dancer and artist whom Erikson had met at a dress ball.[8][10] During their marriage Erikson converted to Christianity.[11][12][13]

In 1933, with Hitler’s rise to power in Germany, the burning of Freud’s books in Berlin and the potential Nazi threat to Austria, the family left an impoverished Vienna with their two young sons and emigrated to Copenhagen. Unable to regain Danish citizenship because of residence requirements, the family left for the United States, where citizenship would not be an issue.[7]

Erikson continued to deepen his interest in areas beyond psychoanalysis and to explore connections between psychology and anthropology. He made important contacts with anthropologists such as Margaret Mead, Gregory Bateson and Ruth Benedict, and these contacts, in turn, led to an excursion in 1938, which was to prove significant in the development of his thinking; he was invited to observe the education of native Sioux children on the Pine Ridge Indian Reservation in South Dakota.[7]

In 1939 he left Yale, and the Eriksons moved to California, where Erik had been invited to join a team engaged in a longitudinal study of child development for the University of California at Berkeley‘s Institute of Child Welfare. In addition, in San Francisco he opened a private practice in child psychoanalysis.

While in California he was able to make his second study of American Indian children when he joined anthropologist Alfred Kroeber on a field trip to Northern California to study the Yurok.[8]

Theories of development and the ego

Erikson is also credited with being one of the originators of Ego psychology, which stressed the role of the ego as being more than a servant of the id. According to Erikson, the environment in which a child lived was crucial to providing growth, adjustment, a source of self-awareness and identity. Erikson won a Pulitzer Prize[19] and a U.S. National Book Award in category Philosophy and Religion[20] for Gandhi’s Truth (1969), which focused more on his theory as applied to later phases in the life cycle.

In Erikson’s discussion of development, rarely did he mention a stage of development by age but in fact did refer to a prolonged adolescence which has led to further investigation into a period of development between adolescence and young adulthood called emerging adulthood[21].

Favorable outcomes of each stage are sometimes known as “virtues,” a term used in the context of Erikson’s work as it is applied to medicine, meaning “potencies.” Erikson’s research suggests that each individual must learn how to hold both extremes of each specific life-stage challenge in tension with one another, not rejecting one end of the tension or the other. Only when both extremes in a life-stage challenge are understood and accepted as both required and useful, can the optimal virtue for that stage surface. Thus, ‘trust’ and ‘mis-trust’ must both be understood and accepted, in order for realistic ‘hope’ to emerge as a viable solution at the first stage. Similarly, ‘integrity’ and ‘despair’ must both be understood and embraced, in order for actionable ‘wisdom’ to emerge as a viable solution at the last stage.

The Erikson life-stage virtue, in order of the eight stages in which they may be acquired, are:

Hope, Basic trust vs. basic mistrust—This stage covers the period of infancy, 0-18 months, which is the most fundamental stage of life. Whether the baby develops basic trust or basic mistrust is not merely a matter of nurture. It is multi-faceted and has strong social components. It depends on the quality of the maternal relationship. The mother carries out and reflects their inner perceptions of trustworthiness, a sense of personal meaning, etc. on the child. If successful in this, the baby develops a sense of trust, which “forms the basis in the child for a sense of identity.” Failure to develop this trust will result in a feeling of fear and a sense that the world is inconsistent and unpredictable.

Will, Autonomy vs. Shame—Covers early childhood around 1–3 years old. Introduces the concept of autonomy vs. shame and doubt. The child begins to discover the beginnings of his or her independence, and parents must facilitate the child’s sense of doing basic tasks “all by himself/herself.” Discouragement can lead to the child doubting his or her efficacy. During this stage the child is usually trying to master toilet training.

Purpose, Initiative vs. Guilt—Preschool / 3–6 years. Does the child have the ability to or do things on their own, such as dress him or herself? If “guilty” about making his or her own choices, the child will not function well. Erikson has a positive outlook on this stage, saying that most guilt is quickly compensated by a sense of accomplishment.

Competence, Industry vs. Inferiority—School-age / 6–11 years. Child comparing self-worth to others (such as in a classroom environment). Child can recognize major disparities in personal abilities relative to other children. Erikson places some emphasis on the teacher, who should ensure that children do not feel inferior.

Fidelity, Identity vs. Role Confusion—Adolescent / 12–18 years. Questioning of self. Who am I, how do I fit in? Where am I going in life? Erikson believes, that if the parents allow the child to explore, they will conclude their own identity. If, however, the parents continually push him/her to conform to their views, the teen will face identity confusion.

Love, Intimacy vs. isolation—This is the first stage of adult development. This development usually happens during young adulthood, which is between the ages of 18 to 35. Dating, marriage, family and friendships are important during the stage in their life. By successfully forming loving relationships with other people, individuals are able to experience love and intimacy. Those who fail to form lasting relationships may feel isolated and alone.

Care, Generativity vs. stagnation—The second stage of adulthood happens between the ages of 35-64. During this time people are normally settled in their life and know what is important to them. A person is either making progress in their career or treading lightly in their career and unsure if this is what they want to do for the rest of their working lives. Also during this time, a person is enjoying raising their children and participating in activities, that gives them a sense of purpose. If a person is not comfortable with the way their life is progressing, they’re usually regretful about the decisions that they have made in the past and feel a sense of uselessness.

Wisdom, Ego integrity vs. despair—This stage affects the age group of 65 and on. During this time an individual has reached the last chapter in their life and retirement is approaching or has already taken place. Ego-integrity means the acceptance of life in its fullness: the victories and the defeats, what was accomplished and what was not accomplished. Wisdom is the result of successfully accomplishing this final developmental task. Wisdom is defined as “informed and detached concern for life itself in the face of death itself.”[22]

On ego identity versus role confusion—ego identity enables each person to have a sense of individuality, or as Erikson would say, “Ego identity, then, in its subjective aspect, is the awareness of the fact that there is a self-sameness and continuity to the ego’s synthesizing methods and a continuity of one’s meaning for others,” (1963). Role confusion, however, is, according to Barbara Engler in her book Personality Theories (2006), “the inability to conceive of oneself as a productive member of one’s own society” (158). This inability to conceive of oneself as a productive member is a great danger; it can occur during adolescence, when looking for an occupation.

Personal life

Erikson married Canadian-born American psychologist Joan Erikson in 1930 and they remained together until his death.[23]

Their daughter, Sue Bloland, “an integrative psychotherapist and psychoanalyst,”[24] described her father as plagued by “lifelong feelings of personal inadequacy.”[25] He thought that by combining resources with his wife, he could “achieve the recognition” that might produce a feeling of adequacy.[26]

The Eriksons had three children, the eldest of whom is sociologist Kai T. Erikson. Erikson died on May 12, 1994 in Harwich, Massachusetts. He and his wife are buried in the First Congregational Church Cemetery in Harwich.[27]

Laqueur lived in the area that would become Israel from 1938 to 1953. After one year at the Hebrew University of Jerusalem, he joined a kibbutz and worked as an agricultural laborer from 1939 to 1944.[1] In 1944, he moved to Jerusalem, where he worked as a journalist until 1953, covering Palestine and other countries in the Middle East.[1]

Russia and Germany: A Century of Conflict, London: Weidenfeld & Nicolson, 1965

1914: The Coming of the First World War, co-edited with George L. Mosse, New York: Harper & Row, 1966

Education and Social Structure in the Twentieth Century, co-edited with George L. Mosse, New York: Harper & Row, 1967

The Fate of the Revolution: Interpretations of Soviet History, London : Weidenfeld & Nicolson, 1967

The Road to Jerusalem: The Origins of the Arab-Israeli Conflict, 1967, New York: Macmillan, 1968 (published in the UK as The Road to War, 1967: The Origins of the Arab-Israel Conflict, London: Weidenfeld & Nicolson, 1969)

Story 2: Proposed Reforming American Immigration for Strong Employment (RAISE) Act will Expose Hypocrisy of Democrats and Republicans In Promoting Open Borders with 30-60 Million Illegal Invasion of United States Over The Last 30 Years and Rising Legal Immigration Instead of Protecting The American Worker and Middle Class — The Betrayal Of American People By The Political Elitist Establishment — Videos

Story 1: Vice-President On The Trump Doctrine In Speech Delivered From Estonia, Latvia, and Lithuania — Videos —

Story 2: President Trump Will Sign Sanctions Bill For Russia, North Korea, and Islamic Republic of Iran — Videos — Story 3: Washington War Fever with Neocon Republicans and Progressive Democrats United Against Russia — Masking Incompetency — Videos

Story 1bama Spy Scandal: Obama Administration Officials Including National Security Adviser Rice, CIA Director Brennan and United Nations Ambassador Power Spied On American People and Trump Campaign By Massive Unmasking Using Intelligence Community For Political Purposes — An Abuse of Power and Felonies Under U.S. Law — Videos

Story 1: Trump Targets Transgender Troops — No More Gender Reassignment Surgeries In Military and Veterans Hospital — Cuts Spending By Millions Per Year — What is Next? — No More Free Viagra — Tranny Boys/Girls No More — Videos —

Story 2: Senate Fails To Pass Senator Rand Paul’s Total Repeal Amendment — Tea Party Revival Calling For Primary Challenge Against Rollover Republican Senators Shelley Moore Capito of West Virginia, Susan Collins of Maine, Dick Heller of Nevada, John McCain of Arizona, Rob Portman of Ohio, Lamar Alexander of Tennessee and Lisa Murkowski of Alaska — All Republicans in Name Only — Really Big Government Democrats — Videos —

Story 3: Trump Rally in Ohio — Neither A Rally Nor A Movement Is Not A Political Party That Votes in Congress — New Viable and Winning American Independence Party Is What Is Needed –Videos

Story 1: Pence Breaks Tie — Senate Will Debate How To Proceed With Obamacare Repeal and Replace — Videos —

Story 2: Congress Overwhelming Passes New Sanctions on Russia, Iran and North Korea — Long Overdue — Videos —

Story 3: Trump Again Critical Of Attorney General Sessions Apparently For Not Prosecuting Leakers and Going After Clinton Foundation Crimes — What about Obama Administration’s Spying On Trump — An Abuse of Power Using Intelligence Community for Political Purposes — Will Trump Dump Sessions? If He Does Trump Will Start To Lose His Supporters in Talk Radio and Voter Base — Direct Deputy Attorney Rod Rosenstein To Fire Mueller — If He Won’t Fire Him — Fire Both Mueller and Rosenstein — Punish Your Enemies and Reward Your Friends President Trump! — “In Your Guts You Know He is Nuts” — Videos

Story 1bama Spy Scandal: Obama Administration Officials Including National Security Adviser Rice, CIA Director Brennan and United Nations Ambassador Power Spied On American People and Trump Campaign By Massive Unmasking Using Intelligence Community For Political Purposes — An Abuse of Power and Felonies Under U.S. Law — Videos

Story 1: Trump Targets Transgender Troops — No More Gender Reassignment Surgeries In Military and Veterans Hospital — Cuts Spending By Millions Per Year — What is Next? — No More Free Viagra — Tranny Boys/Girls No More — Videos —

Story 2: Senate Fails To Pass Senator Rand Paul’s Total Repeal Amendment — Tea Party Revival Calling For Primary Challenge Against Rollover Republican Senators Shelley Moore Capito of West Virginia, Susan Collins of Maine, Dick Heller of Nevada, John McCain of Arizona, Rob Portman of Ohio, Lamar Alexander of Tennessee and Lisa Murkowski of Alaska — All Republicans in Name Only — Really Big Government Democrats — Videos —

Story 3: Trump Rally in Ohio — Neither A Rally Nor A Movement Is Not A Political Party That Votes in Congress — New Viable and Winning American Independence Party Is What Is Needed –Videos

Story 1: Pence Breaks Tie — Senate Will Debate How To Proceed With Obamacare Repeal and Replace — Videos —

Story 2: Congress Overwhelming Passes New Sanctions on Russia, Iran and North Korea — Long Overdue — Videos —

Story 3: Trump Again Critical Of Attorney General Sessions Apparently For Not Prosecuting Leakers and Going After Clinton Foundation Crimes — What about Obama Administration’s Spying On Trump — An Abuse of Power Using Intelligence Community for Political Purposes — Will Trump Dump Sessions? If He Does Trump Will Start To Lose His Supporters in Talk Radio and Voter Base — Direct Deputy Attorney Rod Rosenstein To Fire Mueller — If He Won’t Fire Him — Fire Both Mueller and Rosenstein — Punish Your Enemies and Reward Your Friends President Trump! — “In Your Guts You Know He is Nuts” — Videos

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Story 2: Trump Should Read Saul Alinski Rules For Radicals To Understand What Is Going On — Then Have Department of Justice Investigate The Clinton Charitable Foundation For Public Corruption and Obama Administration For Abuse of Power Using Intelligence Community for Political Purposes And Then Fire Mueller For Conflicts of Interests — The Sooner The Better — Go On Offense Stop Playing Defense — Just Do It! — Videos

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Story 2: Estimated insolvency date of Social Security’s Trust fund is 2034 — and Medicare’s Hospital Trust Fund is 2029 — Social Security and Medicare Benefits Will Be Cut or Taxes Raised or Combination of Benefit Cuts and Tax Increases — Videos —

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Story 2: When Will Attorney General Sessions Appoint A Special Counsel To Investigate Intelligence Community Leaks and Hillary Clinton Mishandling of Classified Documents and Related Pay for Play Public Corruption of Clinton Foundation? — Was Democratic Hired Opposition Research firm Fusion GPS and Christopher Steel Formerly of British Intelligent MI-6 Agent A Cutout For The Russian Disinformation Campaign Included in The Donald Trump — Russia Dossier? — Videos

Rush Limbaugh tells the truth about GOP, December 2014

John Boehner unloads on Trump: A ‘complete disaster’

Then-House Speaker John Boehner on Capitol Hill in February 2015. (J. Scott Applewhite/AP)

Former House speaker John A. Boehner continued a streak of remarkable post-office candor during a Wednesday appearance at a Houston energy conference, telling a luncheon audience that President Trump’s term has — foreign policy aside — been a “complete disaster.”

“Everything else he’s done has been a complete disaster,” Boehner (R-Ohio) said, according to a report in Rigzone, an online energy publication. “He’s still learning how to be president.”

Boehner, who resigned from Congress in October 2015, had praised Trump — a friend and golfing companion from his political years — during the presidential campaign. On Wednesday, he praised Trump’s efforts at getting serious about combating the Islamic State terror group, Rigzone reported, but ended his positive comments there.

Among other remarks, Boehner said Trump should not be allowed to tweet, the publication said.

Dave Schnittger, an aide to Boehner, said Friday the remarks made at the KPMG Global Energy Conference were “reported accurately” by Rigzone.

Boehner has made other public comments critical of his party since leaving office. During the presidential campaign in April 2016, he called then-GOP candidate Ted Cruz “Lucifer in the flesh.” And in February, he made a prescient prediction that a GOP replacement for the Affordable Care Act was “not going to happen” and that “Republicans never, ever agree on health care” — a view he maintained on Wednesday, according to the Rigzone report.

Boehner offered other blunt opinions Wednesday, Rigzone reported. He gave an increasingly pessimistic view that congressional Republicans would pass tax reform, saying “now my odds are 60/40” and that tax reform is “a bunch of happy talk.” And he echoed an emerging piece of D.C. conventional wisdom by calling the border adjustment tax plan favored by Paul D. Ryan (R-Wis.), Boehner’s successor as House speaker, “deader than a doornail.”

And on the various pending investigations into alleged Russian influence on the election and on Trump’s campaign, Boehner said, “they need to get to the bottom of this” but called impeachment a folly pushed by “crazy left-wing Democratic colleagues of mine.”

“Talk of impeachment is the best way to rile up Trump supporters,” he said, according to Rigzone. “Remember, impeachment is not a legal process; it’s a political process.”

Boehner, as he has said in the past, repeated Wednesday that he does not miss his old job: “I wake up every day, drink my morning coffee and say, ‘Hallelujah, hallelujah, hallelujah,’” he said, according to Rigzone.

Career

Attkisson began her broadcast journalism career in 1982, aged 22, as a reporter at WUFT-TV, the PBS station in Gainesville, Florida. She later worked as an anchor and reporter at WTVX-TV Fort Pierce/West Palm Beach, Florida from 1982–1985, WBNS-TV, the CBS affiliate in Columbus, Ohio from 1985–86, and WTVT Tampa, Florida (1986–1990).[7]

1990s

From 1990–1993, Attkisson was an anchor for CNN, and also served as a key anchor for CBS space exploration coverage in 1993.[8] Attkisson left CNN in 1993,[9] moving to CBS, where she anchored the television news broadcast CBS News Up to the Minute and became an investigative correspondent based in Washington, D.C.[7]

She served on the University of Florida‘s Journalism College Advisory Board (1993–1997) and was its chair in 1996.[7] The University gave her an Outstanding Achievement Award in 1997. From 1997 to 2003, Attkisson simultaneously hosted CBS News Up to the Minute and the PBS health-news magazine HealthWeek.[10]

In 2002, she co-authored a college textbook, Writing Right for Broadcast and Internet News; later that same year she won an Emmy Award for her Investigative Journalism about the American Red Cross.[7] The award was presented in New York City on September 10, 2002.[13] Attkisson was part of the CBS News team that received RTNDA-Edward R. Murrow Awards in 2005 for Overall Excellence.[11]

In 2006, Attkisson served as Capitol Hill correspondent for CBS,[14] as one of a small number of female anchors covering the 2006 midterms.[15] Attkisson was part of the CBS News team that received RTNDA-Edward R. Murrow Awards in 2008 for Overall Excellence.[11]

In 2008, Attkisson reported that a claim by Hillary Clinton to have dodged sniper fire in Bosnia was unfounded: Clinton’s trip to Bosnia was risky, Attkisson said, but no real bullets were dodged. Attkisson was on the trip with Clinton.[16] The day after Attkisson’s report on the CBS Evening News, Clinton admitted there was no sniper fire and said she “misspoke.” [17][18]In 2009, Attkisson won an Investigative Emmy Award for Business and Financial Reporting for her exclusive reports on the Troubled Asset Relief Program (TARP) and the bank bailout.[11] The award was presented on December 7 at Fordham University‘s Lincoln Center Campus in New York City.[19]

Attkisson returned to the University of Florida as a keynote speaker at the College of Journalism and Communications in 2010.[6] That same year, she received an Emmy Award nomination for her investigations into members of Congress, and she also received a 2010 Emmy Award nomination for her investigation into waste of tax dollars.[20] In July 2011, Attkisson was nominated for an Emmy Award for her Follow the Money investigations into Congressional travel to the Copenhagen climate summit, and problems with aid to Haiti earthquake victims.[11][21]

In 2011, Paul Offit criticized Attkisson’s reporting on vaccines in his book Deadly Choices as “damning by association” and lacking sufficient evidence.[22] Dr. Offit has been criticized for providing false information about Attkisson and his vaccine industry ties. [23] Attkisson has been identified in the medical literature as using problematic rhetorical tactics that “imply that because there is no conclusive answer to certain problems, vaccines remain a plausible culprit.”[24] Attkisson’s reporting was cited favorably in a letter to the New England Journal of Medicine by neurosurgeon Jon Poling who wrote that Offit had “misrepresented” the case of Hannah Poling v. HHS, and that Offit’s remarks on the case were “not evidence based.”[25]

In June 2012, Attkisson’s investigative reporting for the Gunwalker story also won the CBS Evening News the Radio and Television News Directors Association’s National Edward R. Murrow Award for Excellence in Video Investigative Reporting. The award was presented October 8, 2012 in New York City.[27] In July 2012, Attkisson’s Gunwalker: Fast and Furious reporting received an Emmy Award[28]

On March 10, 2014, Attkisson resigned from CBS News.[29] She stated that the parting was “amicable”.[30]Politico reported that according to sources within CBS there had been tensions leading to “months of hard-fought negotiations” – that Attkisson had been frustrated over what she perceived to be the network’s liberal bias and lack of dedication to investigative reporting, as well as issues she had with the network’s corporate partners, while some[who?] within the network saw her reporting as agenda-driven and doubted her impartiality.[30]

Later that year came the release of her New York Times Best Seller, Stonewalled: One Reporter’s Fight for Truth Against the Forces of Obstruction, Intimidation, and Harassment in Obama’s Washington (Harpers),[4] in which she accused CBS of protecting the Obama administration by not giving enough coverage to such stories as the 2012 Benghazi attack and slow initial enrollments under Obamacare.[31]

In February 2015, Attkisson gave a TEDx talk at the University of Nevada. In the talk, she said that astroturfing was swaying public opinion, legislation and media outlets.[32]

In May 2013, while still employed at CBS, Attkisson alleged that her personal and work computers had been “compromised” for more than two years.[33]CBS News stated that it had investigated her work computer and found evidence of multiple unauthorized accesses by a third party in late 2012.[34] The U.S. Department of Justice denied any involvement.[35] In her 2014 book, she alleged that her personal computer was hacked with keystroke logging spyware, enabling an intruder to read all her e-mail messages and gain access to the passwords for her financial accounts.[36]

In late January 2015, Attkisson appeared before the Senate Judiciary Committee[37] during a confirmation hearing for Loretta Lynch, President Obama’s nominee to replace outgoing Attorney General Eric Holder. Attkisson’s testimony concentrated on the Justice Department under Holder and was not related to Lynch’s qualifications.[by whom?] As part of her appearance in front of that committee, a report by the Office of Inspector General (OIG) was released[38] stating that “their investigation was not able to substantiate… allegations that Attkisson’s computers were subject to remote intrusions by the FBI, other government personnel, or otherwise” and the deletion seen in Attkinsson’s video “appeared to be caused by the backspace key being stuck, rather than a remote intrusion”.[39][40][41] “CBS News told the OIG that they did not conduct any analysis on her personal computer.”[42]

In February 2015, The Washington Examiner clarified that the OIG did not examine Attkisson’s compromised CBS News computer,[42] the OIG only inspected Attkisson’s personal devices.[43]

Speaking to reporters after the Fed’s quarter percentage-point move on Wednesday, Yellen said the central bank was willing to tolerate inflation temporarily overshootingits 2 percent goal and that it intended to keep its policy accommodative for “some time.”

“The simple message is the economy’s doing well. We have confidence in the robustness of the economy and its resilience to shocks,” she said.

As a result, the Fed is sticking with its policy of gradually raising interest rates, Yellen said. In their first forecasts in three months, Fed policy makers penciled in two more quarter-point rate increases this year and three in 2018, unchanged from their projections in December.

Today’s decision “does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy,” the Fed chief said.

Speculation of a more aggressive Fed had mounted in recent days after a host of central bank officials, including Yellen herself, went out of their way to telegraph to financial markets that a rate hike was imminent. The expectations were further fueled by news of rising inflation.

Stocks Advance

Stocks rose and bond yields fell as investors viewed the statement from the Federal Open Market Committee and Yellen’s remarks afterward as a sign that the Fed isn’t in a hurry to remove monetary stimulus. The FOMC raised the target range for the federal funds rate to 0.75 percent to 1 percent, as expected, but Yellen’s lack of urgency to snuff out inflation was a surprise.

R.J. Gallo, a fixed-income investment manager at Federated Investors in Pittsburgh, said the chorus of Fed speakers before this meeting led investors to expect a move up in the number of projected rate hikes this year, and even upgrades by Fed officials in the levels of inflation and growth they anticipated.

None of that materialized.

“You didn’t get any of those things,” Gallo said, which explains why Treasury yields quickly dropped after the Fed released the FOMC statement and a new set of economic projections. “The expectation that Fed was getting more hawkish had to come out of the market.”

The U.S. economy has mostly met the central bank’s goals of full employment and stable prices, and may get further support if President Donald Trump delivers promised fiscal stimulus. Investor and business confidence has soared since Trump won the presidency in November, buoyed by his vows to cut taxes, lift infrastructure spending and ease regulations.

Still, the data don’t show an economy that’s heating up rapidly — a point Yellen herself made after the third rate hike since the 2007-2009 recession ended. In fact, the economy may have “more room to run,” she said.

Stronger business and consumer confidence hasn’t yet translated into increased investment and spending, said Yellen.

“It’s uncertain just how much sentiment actually impacts spending decisions, and I wouldn’t say at this point that I have seen hard evidence of any change in spending decisions,” said the Fed Chair. “Most of the business people that we’ve talked to also have a wait-and-see attitude.”

Retail sales in February grew at the slowest pace since August, a government report showed earlier Wednesday. The Atlanta Fed’s model for GDP predicts an expansion of 0.9 percent in the first quarter, less than a third the pace Trump is aiming for.

Fiscal Stimulus

Asked about the potential for a fiscal boost, Yellen made clear the Fed is still waiting for more concrete policy plans to emerge from the Trump administration before adapting monetary policy in reaction.

“There is great uncertainty about the timing, the size and the character of policy changes that may be put in place,” Yellen said. “I don’t think that’s a decision or set of decisions that we need to make until we know more about what policy changes will go into effect.”

Yellen disputed suggestions that the Fed was on a collision course with the Trump administration over its plans to foster faster economic growth through tax cuts and deregulation. “We would welcome stronger economic growth in the context of price stability,” she said.

She said she had met Trump briefly and had gotten together a couple of times with Treasury Secretary Steven Mnuchin to discuss the economy and financial regulation.

Further underscoring their lack of urgency, Fed officials repeated a commitment to maintain their balance-sheet reinvestment policy until rate increases were well under way. Yellen said officials had discussed the process of reducing the balance sheet gradually, but had made no decisions and would continue to debate the topic.

Policy makers forecast inflation will reach 1.9 percent in the fourth quarter this year, and 2 percent in both 2018 and 2019, according to quarterly median estimates released with the FOMC statement. The Fed’s preferred measure of inflation rose 1.9 percent in the 12 months through January, just shy of its target.

Yellen pointed out, though, that core inflation continues to run somewhat further below 2 percent. That rate, which strips out food and energy costs, stood at 1.7 percent in January. The Fed’s new forecast for the core rate at the end of this year edged up to 1.9 percent, from 1.8 percent in December.

“The committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal,” the Fed said. Discussing the word symmetric in the statement, Yellen said during her press conference that the Fed was not shooting to push inflation over 2 percent but recognized that it could temporarily go above it. Two percent is a target, she reiterated, not a ceiling.

How the Fed Fund Rate Hikes Affect the US Dollar

Changes in the federal funds rate will always affect the U.S. dollar. When the Federal Reserve increases the federal funds rate, it normally reduces inflationary pressure and works to appreciate the dollar.

Since June 2006, however, the Fed has maintained a federal funds rate of close to 0%. In the wake of the 2008 financial crisis, the federal funds rate fluctuated between 0-0.25%, and is now 0.75%.

The Fed used this monetary policy to help achieve maximum employment and stable prices. Now that the 2008 financial crisis has largely subsided, the Fed will look to increase interest rates to continue to achieve employment and to stabilize prices.

Inflation of the U.S. Dollar

The best way to achieve full employment and stable prices is to set the inflation rate of the dollar at 2%. In 2011, the Fed officially adopted a 2% annual increase in the price index for personal consumption expenditures as its target. When the economy is weak, inflation naturally falls; when the economy is strong, rising wages increase inflation. Keeping inflation at a growth rate of 2% helps the economy grow at a healthy rate.

Adjustments to the federal funds rate can also affect inflation in the United States. The Fed controls the economy by increasing interest rates when the economy is growing too fast. This encourages people to save more and spend less, reducing inflationary pressure. Conversely, when the economy is in a recession or growing too slowly, the Fed reduces interest rates to stimulate spending, which increases inflation.

During the 2008 financial crisis, the low federal funds rate should have increased inflation. Over this period, the federal funds rate was set near 0%, which encouraged spending and would normally increase inflation.

However, inflation is still well below the 2% target, which is contrary to the normal effects of low interest rates. The Fed cites one-off factors, such as falling oil prices and the strengthening dollar, as the reasons why inflation has remained low in a low interest environment.

The Fed believes that these factors will eventually fade and that inflation will increase above the target 2%. To prevent this eventual increase in inflation, hiking the federal funds rate reduces inflationary pressure and cause inflation of the dollar to remain around 2%.

Appreciation of the U.S. Dollar

Increases in the federal funds rate also result in a strengthening of the U.S. dollar. Other ways that the dollar can appreciate include increases in average wages and increases in overall consumption. However, although jobs are being created, wage rates are stagnant.

Without an increase in wage rates to go along with a strengthening job market, consumption won’t increase enough to sustain economic growth. Additionally, consumption remains subdued due to the fact that the labor force participation rate was close to its 35-year low in 2015. The Fed has kept interest rates low because a lower federal funds rate supports business expansions, which leads to more jobs and higher consumption. This has all worked to keep appreciation of the U.S. dollar low.

However, the U.S. is ahead of the other developed markets in terms of its economic recovery. Although the Fed raises rates cautiously, the U.S. could see higher interest rates before the other developed economies.

Overall, under normal economic conditions, increases in the federal funds rate reduce inflation and increase the appreciation of the U.S. dollar.

Financial repression

Financial repression refers to “policies that result in savers earning returns below the rate of inflation” in order to allow banks to “provide cheap loans to companies and governments, reducing the burden of repayments”.[1] It can be particularly effective at liquidating government debtdenominated in domestic currency.[2] It can also lead to a large expansions in debt “to levels evoking comparisons with the excesses that generated Japan’s lost decade and the Asian financial crisis” in 1997.[1]

Government restrictions on the transfer of assets abroad through the imposition of capital controls.

These measures allow governments to issue debt at lower interest rates. A low nominal interest rate can reduce debt servicing costs, while negative real interest rates erodes the real value of government debt.[5] Thus, financial repression is most successful in liquidating debts when accompanied by inflation and can be considered a form of taxation,[6] or alternatively a form of debasement.[7]

The size of the financial repression tax for 24 emerging markets from 1974 to 1987. Their results showed that financial repression exceeded 2% of GDP for seven countries, and greater than 3% for five countries. For five countries (India, Mexico, Pakistan, Sri Lanka, and Zimbabwe) it represented approximately 20% of tax revenue. In the case of Mexico financial repression was 6% of GDP, or 40% of tax revenue.[8]

Financial repression is categorized as “macroprudential regulation“—i.e., government efforts to “ensure the health of an entire financial system.[2]

Examples

After World War II

Financial repression “played an important role in reducing debt-to-GDP ratios after World War II” by keeping real interest rates for government debt below 1% for two-thirds of the time between 1945 and 1980, the United States was able to “inflate away” the large debt (122% of GDP) left over from the Great Depression and World War II.[2] In the UK, government debt declined from 216% of GDP in 1945 to 138% ten years later in 1955.[9]

China

China‘s economic growth has been attributed to financial repression thanks to “low returns on savings and the cheap loans that it makes possible”. This has allowed China to rely on savings-financed investments for economic growth. However, because low returns also dampens consumer spending, household expenditures account for “a smaller share of GDP in China than in any other major economy”.[1] However, as of December 2014, the People’s Bank of China “started to undo decades of financial repression” and the government now allows Chinese savers to collect up to a 3.3% return on one-year deposits. At China’s 1.6% inflation rate, this is a “high real-interest rate compared to other major economies”.[1]

After the 2008 economic recession

In a 2011 NBER working paper, Carmen Reinhart and Maria Belen Sbrancia speculate on a possible return by governments to this form of debt reduction in order to deal with high debt levels following the 2008 economic crisis.[5]

Criticism

Critics[who?] argue that if this view was true, investors (i.e., capital-seeking parties) would be inclined to demand capital in large quantities and would be buying capital goods from this capital. This high demand for capital goods would certainly lead to inflation and thus the central banks would be forced to raise interest rates again. As a boom pepped by low interest rates fails to appear these days in industrialized countries, this is a sign that the low interest rates seem to be necessary to ensure an equilibrium on the capital market, thus to balance capital-supply—i.e., savers—on one side and capital-demand—i.e., investors and the government—on the other. This view argues that interest rates would be even lower if it were not for the high government debt ratio (i.e., capital demand from the government).

Free-market economists argue that financial repression crowds out private-sector investment, thus undermining growth. On the other hand, “postwar politicians clearly decided this was a price worth paying to cut debt and avoid outright default or draconian spending cuts. And the longer the gridlock over fiscal reform rumbles on, the greater the chance that ‘repression’ comes to be seen as the least of all evils”.[11]

Also, financial repression has been called a “stealth tax” that “rewards debtors and punishes savers—especially retirees” because their investments will no longer generate the expected return, which is income for retirees.[10][12] “One of the main goals of financial repression is to keep nominal interest rates lower than they would be in more competitive markets. Other things equal, this reduces the government’s interest expenses for a given stock of debt and contributes to deficit reduction. However, when financial repression produces negative real interest rates (nominal rates below the inflation rate), it reduces or liquidates existing debts and becomes the equivalent of a tax—a transfer from creditors (savers) to borrowers, including the government.”[2]

The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate.

The federal funds target rate is determined by a meeting of the members of the Federal Open Market Committee which normally occurs eight times a year about seven weeks apart. The committee may also hold additional meetings and implement target rate changes outside of its normal schedule.

Financial Institutions are obligated by law to maintain certain levels of reserves, either as reserves with the Fed or as vault cash. The level of these reserves is determined by the outstanding assets and liabilities of each depository institution, as well as by the Fed itself, but is typically 10%[4] of the total value of the bank’s demand accounts (depending on bank size). In the range of $9.3 million to $43.9 million, for transaction deposits (checking accounts, NOWs, and other deposits that can be used to make payments) the reserve requirement in 2007-2008 was 3 percent of the end-of-the-day daily average amount held over a two-week period. Transaction deposits over $43.9 million held at the same depository institution carried a 10 percent reserve requirement.

For example, assume a particular U.S. depository institution, in the normal course of business, issues a loan. This dispenses money and decreases the ratio of bank reserves to money loaned. If its reserve ratio drops below the legally required minimum, it must add to its reserves to remain compliant with Federal Reserve regulations. The bank can borrow the requisite funds from another bank that has a surplus in its account with the Fed. The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate.

The nominal rate is a target set by the governors of the Federal Reserve, which they enforce by open market operations and adjusting the interest paid on required and excess reserve balances. That nominal rate is almost always what is meant by the media referring to the Federal Reserve “changing interest rates.” The actual federal funds rate generally lies within a range of that target rate, as the Federal Reserve cannot set an exact value through open market operations.

Another way banks can borrow funds to keep up their required reserves is by taking a loan from the Federal Reserve itself at the discount window. These loans are subject to audit by the Fed, and the discount rate is usually higher than the federal funds rate. Confusion between these two kinds of loans often leads to confusion between the federal funds rate and the discount rate. Another difference is that while the Fed cannot set an exact federal funds rate, it does set the specific discount rate.

The federal funds rate target is decided by the governors at Federal Open Market Committee (FOMC) meetings. The FOMC members will either increase, decrease, or leave the rate unchanged depending on the meeting’s agenda and the economic conditions of the U.S. It is possible to infer the market expectations of the FOMC decisions at future meetings from the Chicago Board of Trade (CBOT) Fed Funds futures contracts, and these probabilities are widely reported in the financial media.

Applications

Interbank borrowing is essentially a way for banks to quickly raise money. For example, a bank may want to finance a major industrial effort but may not have the time to wait for deposits or interest (on loan payments) to come in. In such cases the bank will quickly raise this amount from other banks at an interest rate equal to or higher than the Federal funds rate.

Raising the federal funds rate will dissuade banks from taking out such inter-bank loans, which in turn will make cash that much harder to procure. Conversely, dropping the interest rates will encourage banks to borrow money and therefore invest more freely.[5] This interest rate is used as a regulatory tool to control how freely the U.S. economy operates.

By setting a higher discount rate the Federal Bank discourages banks from requisitioning funds from the Federal Bank, yet positions itself as a lender of last resort.

Comparison with LIBOR

Though the London Interbank Offered Rate (LIBOR) and the federal funds rate are concerned with the same action, i.e. interbank loans, they are distinct from one another, as follows:

The target federal funds rate is a target interest rate that is set by the FOMC for implementing U.S. monetary policies.

The (effective) federal funds rate is achieved through open market operations at the Domestic Trading Desk at the Federal Reserve Bank of New York which deals primarily in domestic securities (U.S. Treasury and federal agencies’ securities).[6]

LIBOR is based on a questionnaire where a selection of banks guess the rates at which they could borrow money from other banks.

LIBOR may or may not be used to derive business terms. It is not fixed beforehand and is not meant to have macroeconomic ramifications.[7]

Predictions by the market

Considering the wide impact a change in the federal funds rate can have on the value of the dollar and the amount of lending going to new economic activity, the Federal Reserve is closely watched by the market. The prices of Option contracts on fed funds futures (traded on the Chicago Board of Trade) can be used to infer the market’s expectations of future Fed policy changes. Based on CME Group 30-Day Fed Fund futures prices, which have long been used to express the market’s views on the likelihood of changes in U.S. monetary policy, the CME Group FedWatch tool allows market participants to view the probability of an upcoming Fed Rate hike. One set of such implied probabilities is published by the Cleveland Fed.

Historical rates

As of December 16, 2008, the most recent change the FOMC has made to the funds target rate is a 75 to 100 basis point cut from 1.0% to a range of zero to 0.25%. According to Jack A. Ablin, chief investment officer at Harris Private Bank, one reason for this unprecedented move of having a range, rather than a specific rate, was because a rate of 0% could have had problematic implications for money market funds, whose fees could then outpace yields.[8] This followed the 50 basis point cut on October 29, 2008, and the unusually large 75 basis point cut made during a special January 22, 2008 meeting, as well as a 50 basis point cut on January 30, 2008, a 75 basis point cut on March 18, 2008, and a 50 basis point cut on October 8, 2008.[9]

Explanation of federal funds rate decisions

When the Federal Open Market Committee wishes to reduce interest rates they will increase the supply of money by buying government securities. When additional supply is added and everything else remains constant, price normally falls. The price here is the interest rate (cost of money) and specifically refers to the Federal Funds Rate. Conversely, when the Committee wishes to increase the Fed Funds Rate, they will instruct the Desk Manager to sell government securities, thereby taking the money they earn on the proceeds of those sales out of circulation and reducing the money supply. When supply is taken away and everything else remains constant, price (or in this case interest rates) will normally rise.[10]

The Federal Reserve has responded to a potential slow-down by lowering the target federal funds rate during recessions and other periods of lower growth. In fact, the Committee’s lowering has recently predated recessions,[9] in order to stimulate the economy and cushion the fall. Reducing the Fed Funds Rate makes money cheaper, allowing an influx of credit into the economy through all types of loans.

The charts linked below show the relation between S&P 500 and interest rates.

Bill Gross of PIMCO suggested that in the prior 15 years ending in 2007, in each instance where the fed funds rate was higher than the nominal GDP growth rate, assets such as stocks and/or housing fell.[24]

The money supply has different components, generally broken down into “narrow” and “broad” money, reflecting the different degrees of liquidity (‘spendability’) of each different type, as broader forms of money can be converted into narrow forms of money (or may be readily accepted as money by others, such as personal checks).[1]

For example, demand deposits are technically promises to pay on demand, while savings deposits are promises to pay subject to some withdrawal restrictions, and Certificates of Deposit are promises to pay only at certain specified dates; each can be converted into money, but “narrow” forms of money can be converted more readily. The Federal Reserve directly controls only the most narrow form of money, physical cash outstanding along with the reserves of banks throughout the country (known as M0 or the monetary base); the Federal Reserve indirectly influences the supply of other types of money.[1]

Broad money includes money held in deposit balances in banks and other forms created in the financial system. Basic economics also teaches that the money supply shrinks when loans are repaid;[2][3] however, the money supply will not necessarily decrease depending on the creation of new loans and other effects. Other than loans, investment activities of commercial banks and the Federal Reserve also increase and decrease the money supply.[4] Discussion of “money” often confuses the different measures and may lead to misguided commentary on monetary policy and misunderstandings of policy discussions.[5]

Monetary policy in the US is determined and implemented by the US Federal Reserve System, commonly referred to as the Federal Reserve. Established in 1913 by the Federal Reserve Act to provide central banking functions,[6] the Federal Reserve System is a quasi-public institution. Ostensibly, the Federal Reserve Banks are 12 private banking corporations;[7][8][9] they are independent in their day-to-day operations, but legislatively accountable to Congress through the auspices of Federal Reserve Board of Governors.

The Board of Governors is an independent governmental agency consisting of seven officials and their support staff of over 1800 employees headquartered in Washington, D.C.[10] It is independent in the sense that the Board currently operates without official obligation to accept the requests or advice of any elected official with regard to actions on the money supply,[11]and its methods of funding also preserve independence. The Governors are nominated by the President of the United States, and nominations must be confirmed by the U.S. Senate.[12]

The presidents of the Federal Reserve Banks are nominated by each bank’s respective Board of Directors, but must also be approved by the Board of Governors of the Federal Reserve. The Chairman of the Federal Reserve Board is generally considered to have the most important position, followed by the president of the Federal Reserve Bank of New York.[12] The Federal Reserve System is primarily funded by interest collected on their portfolio of securities from the US Treasury, and the Fed has broad discretion in drafting its own budget,[13] but, historically, nearly all the interest the Federal Reserve collects is rebated to the government each year.[14]

The Federal Reserve has three main mechanisms for manipulating the money supply. It can buy or sell treasury securities. Selling securities has the effect of reducing the monetary base (because it accepts money in return for purchase of securities), taking that money out of circulation. Purchasing treasury securities increases the monetary base (because it pays out hard currency in exchange for accepting securities). Secondly, the discount rate can be changed. And finally, the Federal Reserve can adjust the reserve requirement, which can affect the money multiplier; the reserve requirement is adjusted only infrequently, and was last adjusted in 1992.[15]

In practice, the Federal Reserve uses open market operations to influence short-term interest rates, which is the primary tool of monetary policy. The federal funds rate, for which the Federal Open Market Committee announces a target on a regular basis, reflects one of the key rates for interbank lending. Open market operations change the supply of reserve balances, and the federal funds rate is sensitive to these operations.[16]

In theory, the Federal Reserve has unlimited capacity to influence this rate, and although the federal funds rate is set by banks borrowing and lending funds to each other, the federal funds rate generally stays within a limited range above and below the target (as participants are aware of the Fed’s power to influence this rate).

Assuming a closed economy, where foreign capital or trade does not affect the money supply, when money supply increases, interest rates go down. Businesses and consumers have a lower cost of capital and can increase spending and capital improvement projects. This encourages short-term growth. Conversely, when the money supply falls, interest rates go up, increasing the cost of capital and leading to more conservative spending and investment. The Federal reserve increases interest rates to combat Inflation.

When money is deposited in a bank, it can then be lent out to another person. If the initial deposit was $100 and the bank lends out $100 to another customer the money supply has increased by $100. However, because the depositor can ask for the money back, banks have to maintain minimum reserves to service customer needs. If the reserve requirement is 10% then, in the earlier example, the bank can lend $90 and thus the money supply increases by only $90. The reserve requirement therefore acts as a limit on this multiplier effect. Because the reserve requirement only applies to the more narrow forms of money creation (corresponding to M1), but does not apply to certain types of deposits (such as time deposits), reserve requirements play a limited role in monetary policy.[17]

Currently, the US government maintains over US$800 billion in cash money (primarily Federal Reserve Notes) in circulation throughout the world,[18][19] up from a sum of less than $30 billion in 1959. Below is an outline of the process which is currently used to control the amount of money in the economy. The amount of money in circulation generally increases to accommodate money demanded by the growth of the country’s production. The process of money creation usually goes as follows:

Banks go through their daily transactions. Of the total money deposited at banks, significant and predictable proportions often remain deposited, and may be referred to as “core deposits.” Banks use the bulk of “non-moving” money (their stable or “core” deposit base) by loaning it out.[20] Banks have a legal obligation to keep a certain fraction of bank deposit money on-hand at all times.[21]

In order to raise additional money to cover excess spending, Congress increases the size of the National Debt by issuing securities typically in the form of a Treasury Bond[22] (see United States Treasury security). It offers the Treasury security for sale, and someone pays cash to the government in exchange. Banks are often the purchasers of these securities, and these securities currently play a crucial role in the process.

The 12-person Federal Open Market Committee, which consists of the heads of the Federal Reserve System (the seven Federal governors and five bank presidents), meets eight times a year to determine how they would like to influence the economy.[23] They create a plan called the country’s “monetary policy” which sets targets for things such as interest rates.[24]

Every business day, the Federal Reserve System engages in Open market operations.[25] If the Federal Reserve wants to increase the money supply, it will buy securities (such as U.S. Treasury Bonds) anonymously from banks in exchange for dollars. If the Federal Reserve wants to decrease the money supply, it will sell securities to the banks in exchange for dollars, taking those dollars out of circulation.[26][27] When the Federal Reserve makes a purchase, it credits the seller’s reserve account (with the Federal Reserve). The money that it deposits into the seller’s account is not transferred from any existing funds, therefore it is at this point that the Federal Reserve has created High-powered money.

By means of open market operations, the Federal Reserve affects the free reserves of commercial banks in the country.[28] Anna Schwartz explains that “if the Federal Reserve increases reserves, a single bank can make loans up to the amount of its excess reserves, creating an equal amount of deposits”.[26][27][29]

Since banks have more free reserves, they may loan out the money, because holding the money would amount to accepting the cost of foregone interest[28][30] When a loan is granted, a person is generally granted the money by adding to the balance on their bank account.[31]

This is how the Federal Reserve’s high-powered money is multiplied into a larger amount of broad money, through bank loans; as written in a particular case study, “as banks increase or decrease loans, the nation’s (broad) money supply increases or decreases.”[3] Once granted these additional funds, the recipient has the option to withdraw physical currency (dollar bills and coins) from the bank, which will reduce the amount of money available for further on-lending (and money creation) in the banking system.[32]

In many cases, account-holders will request cash withdrawals, so banks must keep a supply of cash handy. When they believe they need more cash than they have on hand, banks can make requests for cash with the Federal Reserve. In turn, the Federal Reserve examines these requests and places an order for printed money with the US Treasury Department.[33] The Treasury Department sends these requests to the Bureau of Engraving and Printing (to make dollar bills) and the Bureau of the Mint (to stamp the coins).

The U.S. Treasury sells this newly printed money to the Federal Reserve for the cost of printing.[citation needed] This is about 6 cents per bill for any denomination.[34] Aside from printing costs, the Federal Reserve must pledge collateral (typically government securities such as Treasury bonds) to put new money, which does not replace old notes, into circulation.[35]This printed cash can then be distributed to banks, as needed.

Though the Federal Reserve authorizes and distributes the currency printed by the Treasury (the primary component of the narrow monetary base), the broad money supply is primarily created by commercial banks through the money multiplier mechanism.[29][31][36][37] One textbook summarizes the process as follows:

“The Fed” controls the money supply in the United States by controlling the amount of loans made by commercial banks. New loans are usually in the form of increased checking account balances, and since checkable deposits are part of the money supply, the money supply increases when new loans are made …[38]

This type of money is convertible into cash when depositors request cash withdrawals, which will require banks to limit or reduce their lending.[39][32] The vast majority of the broad money supply throughout the world represents current outstanding loans of banks to various debtors.[38][40][41] A very small amount of U.S. currency still exists as “United States Notes“, which have no meaningful economic difference from Federal Reserve notes in their usage, although they departed significantly in their method of issuance into circulation. The currency distributed by the Federal Reserve has been given the official designation of “Federal Reserve Notes.”[42]

In 2005, the Federal Reserve held approximately 9% of the national debt[43] as assets against the liability of printed money. In previous periods, the Federal Reserve has used other debt instruments, such as debt securities issued by private corporations. During periods when the national debt of the United States has declined significantly (such as happened in fiscal years 1999 and 2000), monetary policy and financial markets experts have studied the practical implications of having “too little” government debt: both the Federal Reserve and financial markets use the price information, yield curve and the so-called risk free rate extensively.[44]

Experts are hopeful that other assets could take the place of National Debt as the base asset to back Federal Reserve notes, and Alan Greenspan, long the head of the Federal Reserve, has been quoted as saying, “I am confident that U.S. financial markets, which are the most innovative and efficient in the world, can readily adapt to a paydown of Treasury debt by creating private alternatives with many of the attributes that market participants value in Treasury securities.”[45] In principle, the government could still issue debt securities in significant quantities while having no net debt, and significant quantities of government debt securities are also held by other government agencies.

Although the U.S. government receives income overall from seigniorage, there are costs associated with maintaining the money supply.[41][46] Leading ecological economist and steady-state theoristHerman Daly, claims that “over 95% of our [broad] money supply [in the United States] is created by the private banking system (demand deposits) and bears interest as a condition of its existence,”[41] a conclusion drawn from the Federal Reserve’s ultimate dependence on increased activity in fractional reserve lending when it exercises open market operations.[47]Economist Eric Miller criticizes Daly’s logic because money is created in the banking system in response to demand for the money,[48] which justifies cost.[citation needed]

Thus, use of expansionary open market operations typically generates more debt in the private sector of society (in the form of additional bank deposits).[49] The private banking system charges interest to borrowers as a cost to borrow the money.[3][31][50] The interest costs are borne by those that have borrowed,[3][31] and without this borrowing, open market operations would be unsuccessful in maintaining the broad money supply,[30] though alternative implementations of monetary policy could be used. Depositors of funds in the banking system are paid interest on their savings (or provided other services, such as checking account privileges or physical security for their “cash”), as compensation for “lending” their funds to the bank.

Increases (or contractions) of the money supply corresponds to growth (or contraction) in interest-bearing debt in the country.[3][30][41] The concepts involved in monetary policy may be widely misunderstood in the general public, as evidenced by the volume of literature on topics such as “Federal Reserve conspiracy” and “Federal Reserve fraud.”[51]

Uncertainties

A few of the uncertainties involved in monetary policy decision making are described by the federal reserve:[52]

While these policy choices seem reasonably straightforward, monetary policy makers routinely face certain notable uncertainties. First, the actual position of the economy and growth in aggregate demand at any time are only partially known, as key information on spending, production, and prices becomes available only with a lag. Therefore, policy makers must rely on estimates of these economic variables when assessing the appropriate course of policy, aware that they could act on the basis of misleading information. Second, exactly how a given adjustment in the federal funds rate will affect growth in aggregate demand—in terms of both the overall magnitude and the timing of its impact—is never certain. Economic models can provide rules of thumb for how the economy will respond, but these rules of thumb are subject to statistical error. Third, the growth in aggregate supply, often called the growth in potential output, cannot be measured with certainty.

In practice, as previously noted, monetary policy makers do not have up-to-the-minute information on the state of the economy and prices. Useful information is limited not only by lags in the collection and availability of key data but also by later revisions, which can alter the picture considerably. Therefore, although monetary policy makers will eventually be able to offset the effects that adverse demand shocks have on the economy, it will be some time before the shock is fully recognized and—given the lag between a policy action and the effect of the action on aggregate demand—an even longer time before it is countered. Add to this the uncertainty about how the economy will respond to an easing or tightening of policy of a given magnitude, and it is not hard to see how the economy and prices can depart from a desired path for a period of time.

The statutory goals of maximum employment and stable prices are easier to achieve if the public understands those goals and believes that the Federal Reserve will take effective measures to achieve them.

Although the goals of monetary policy are clearly spelled out in law, the means to achieve those goals are not. Changes in the FOMC’s target federal funds rate take some time to affect the economy and prices, and it is often far from obvious whether a selected level of the federal funds rate will achieve those goals.

Opinions of the Federal Reserve

The Federal Reserve is lauded by some economists, while being the target of scathing criticism by other economists, legislators, and sometimes members of the general public. The former Chairman of the Federal Reserve Board, Ben Bernanke, is one of the leading academic critics of the Federal Reserve’s policies during the Great Depression.[53]

Achievements

One of the functions of a central bank is to facilitate the transfer of funds through the economy, and the Federal Reserve System is largely responsible for the efficiency in the banking sector. There have also been specific instances which put the Federal Reserve in the spotlight of public attention. For instance, after the stock market crash in 1987, the actions of the Fed are generally believed to have aided in recovery. Also, the Federal Reserve is credited for easing tensions in the business sector with the reassurances given following the 9/11 terrorist attacks on the United States.[54]

Criticisms

The Federal Reserve has been the target of various criticisms, involving: accountability, effectiveness, opacity, inadequate banking regulation, and potential market distortion. Federal Reserve policy has also been criticized for directly and indirectly benefiting large banks instead of consumers. For example, regarding the Federal Reserve’s response to the 2007–2010 financial crisis, Nobel laureate Joseph Stiglitz explained how the U.S. Federal Reserve was implementing another monetary policy —creating currency— as a method to combat the liquidity trap.[55]

By creating $600 billion and inserting this directly into banks the Federal Reserve intended to spur banks to finance more domestic loans and refinance mortgages. However, banks instead were spending the money in more profitable areas by investing internationally in emerging markets. Banks were also investing in foreign currencies which Stiglitz and others point out may lead to currency wars while China redirects its currency holdings away from the United States.[56]

Auditing

The Federal Reserve is subject to different requirements for transparency and audits than other government agencies, which its supporters claim is another element of the Fed’s independence. Although the Federal Reserve has been required by law to publish independently auditedfinancial statements since 1999, the Federal Reserve is not audited in the same way as other government agencies. Some confusion can arise because there are many types of audits, including: investigative or fraud audits; and financial audits, which are audits of accounting statements; there are also compliance, operational, and information system audits.

The Federal Reserve’s annual financial statements are audited by an outside auditor. Similar to other government agencies, the Federal Reserve maintains an Office of the Inspector General, whose mandate includes conducting and supervising “independent and objective audits, investigations, inspections, evaluations, and other reviews of Board programs and operations.”[57] The Inspector General’s audits and reviews are available on the Federal Reserve’s website.[58][59]

The Government Accountability Office (GAO) has the power to conduct audits, subject to certain areas of operations that are excluded from GAO audits; other areas may be audited at specific Congressional request, and have included bank supervision, government securities activities, and payment system activities.[60][61] The GAO is specifically restricted any authority over monetary policy transactions;[60] the New York Times reported in 1989 that “such transactions are now shielded from outside audit, although the Fed influences interest rates through the purchase of hundreds of billions of dollars in Treasury securities.”[62] As mentioned above, it was in 1999 that the law governing the Federal Reserve was amended to formalize the already-existing annual practice of ordering independent audits of financial statements for the Federal Reserve Banks and the Board;[63] the GAO’s restrictions on auditing monetary policy continued, however.[61]

Congressional oversight on monetary policy operations, foreign transactions, and the FOMC operations is exercised through the requirement for reports and through semi-annual monetary policy hearings.[61] Scholars have conceded that the hearings did not prove an effective means of increasing oversight of the Federal Reserve, perhaps because “Congresspersons prefer to bash an autonomous and secretive Fed for economic misfortune rather than to share the responsibility for that misfortune with a fully accountable Central Bank,” although the Federal Reserve has also consistently lobbied to maintain its independence and freedom of operation.[64]

Fulfillment of wider economic goals

By law, the goals of the Fed’s monetary policy are: high employment, sustainable growth, and stable prices.[65]

Critics say that monetary policy in the United States has not achieved consistent success in meeting the goals that have been delegated to the Federal Reserve System by Congress. Congress began to review more options with regard to macroeconomic influence beginning in 1946 (after World War II), with the Federal Reserve receiving specific mandates in 1977 (after the country suffered a period of stagflation).

Throughout the period of the Federal Reserve following the mandates, the relative weight given to each of these goals has changed, depending on political developments.[citation needed] In particular, the theories of Keynesianism and monetarism have had great influence on both the theory and implementation of monetary policy, and the “prevailing wisdom” or consensus view of the economic and financial communities has changed over the years.[66]

Elastic currency (magnitude of the money multiplier): the success of monetary policy is dependent on the ability to strongly influence the supply of money available to the citizens. If a currency is highly “elastic” (that is, has a higher money multiplier, corresponding to a tendency of the financial system to create more broad money for a given quantity of base money), plans to expand the money supply and accommodate growth are easier to implement. Low elasticity was one of many factors that contributed to the depth of the Great Depression: as banks cut lending, the money multiplier fell, and at the same time the Federal Reserve constricted the monetary base. The depression of the late 1920s is generally regarded as being the worst in the country’s history, and the Federal Reserve has been criticized for monetary policy which worsened the depression.[67] Partly to alleviate problems related to the depression, the United States transitioned from a gold standard and now uses a fiat currency; elasticity is believed to have been increased greatly.[68]

Stable prices – While some economists would regard any consistent inflation as a sign of unstable prices,[71] policymakers could be satisfied with 1 or 2%;[72] the consensus of “price stability” constituting long-run inflation of 1-2% is, however, a relatively recent development, and a change that has occurred at other central banks throughout the world. Inflation has averaged a 4.22% increase annually following the mandates applied in 1977; historic inflation since the establishment of the Federal Reserve in 1913 has averaged 3.4%.[73] In contrast, some research indicates that average inflation for the 250 years before the system was near zero percent, though there were likely sharper upward and downward spikes in that timeframe as compared with more recent times.[74] Central banks in some other countries, notably the German Bundesbank, had considerably better records of achieving price stability drawing on experience from the two episodes of hyperinflation and economic collapse under the country’s previous central bank.

Inflation worldwide has fallen significantly since former Federal Reserve Chairman Paul Volcker began his tenure in 1979, a period which has been called the Great Moderation; some commentators attribute this to improved monetary policy worldwide, particularly in the Organisation for Economic Co-operation and Development.[75][76]BusinessWeek notes that inflation has been relatively low since mid-1980s[77] and it was during this time that Volcker wrote (in 1995), “It is a sobering fact that the prominence of central banks [such as the Federal Reserve] in this century has coincided with a general tendency towards more inflation, not less. By and large, if the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with ‘free banking.'”.

Sustainable growth – The growth of the economy may not be sustainable as the ability for households to save money has been on an overall decline[78] and household debt is consistently rising.[79]

Cause of The Great Depression

Monetarists who believe that the Great Depression started as an ordinary recession but significant policy mistakes by monetary authorities (especially the Federal Reserve) caused a shrinking of the money supply which greatly exacerbated the economic situation, causing a recession to descend into the Great Depression.

Public confusion

The Federal Reserve has established a library of information on their websites, however, many experts have spoken about the general level of public confusion that still exists on the subject of the economy; this lack of understanding of macroeconomic questions and monetary policy, however, exists in other countries as well. Critics of the Fed widely regard the system as being “opaque“, and one of the Fed’s most vehement opponents of his time, Congressman Louis T. McFadden, even went so far as to say that “Every effort has been made by the Federal Reserve Board to conceal its powers….”[80]

There are, on the other hand, many economists who support the need for an independent central banking authority, and some have established websites that aim to clear up confusion about the economy and the Federal Reserve’s operations. The Federal Reserve website itself publishes various information and instructional materials for a variety of audiences.

Briefly, the theory holds that an artificial injection of credit, from a source such as a central bank like the Federal Reserve, sends false signals to entrepreneurs to engage in long-term investments due to a favorably low interest rate. However, the surge of investments undertaken represents an artificial boom, or bubble, because the low interest rate was achieved by an artificial expansion of the money supply and not by savings. Hence, the pool of real savings and resources have not increased and do not justify the investments undertaken.

These investments, which are more appropriately called “malinvestments”, are realized to be unsustainable when the artificial credit spigot is shut off and interest rates rise. The malinvestments and unsustainable projects are liquidated, which is the recession. The theory demonstrates that the problem is the artificial boom which causes the malinvestments in the first place, made possible by an artificial injection of credit not from savings.

According to Austrian economics, without government intervention, interest rates will always be an equilibrium between the time-preferences of borrowers and savers, and this equilibrium is simply distorted by government intervention. This distortion, in their view, is the cause of the business cycle. Some Austrian economists—but by no means all—also support full reserve banking, a hypothetical financial/banking system where banks may not lend deposits. Others may advocate free banking, whereby the government abstains from any interference in what individuals may choose to use as money or the extent to which banks create money through the deposit and lending cycle.

Reserve requirement

The Federal Reserve regulates banking, and one regulation under its direct control is the reserve requirement which dictates how much money banks must keep in reserves, as compared to its demand deposits. Banks use their observation that the majority of deposits are not requested by the account holders at the same time.

Currently, the Federal Reserve requires that banks keep 10% of their deposits on hand.[81] Some countries have no nationally mandated reserve requirements—banks use their own resources to determine what to hold in reserve, however their lending is typically constrained by other regulations.[82] Other factors being equal, lower reserve percentages increases the possibility of Bank runs, such as the widespread runs of 1931. Low reserve requirements also allow for larger expansions of the money supply by actions of commercial banks—currently the private banking system has created much of the broad money supply of US dollars through lending activity. Monetary policy reform calling for 100% reserves has been advocated by economists such as: Irving Fisher,[83]Frank Knight,[84] many ecological economists along with economists of the Chicago School and Austrian School. Despite calls for reform, the nearly universal practice of fractional-reserve banking has remained in the United States.

Criticism of private sector involvement

Historically and to the present day, various social and political movements (such as social credit) have criticized the involvement of the private sector in “creating money”, claiming that only the government should have the power to “make money”. Some proponents also support full reserve banking or other non-orthodox approaches to monetary policy. Various terminology may be used, including “debt money”, which may have emotive or political connotations. These are generally considered to be akin to conspiracy theories by mainstream economists and ignored in academic literature on monetary policy.

Monetary policy conducted under the assumption of a NAIRU involves allowing just enough unemployment in the economy to prevent inflation rising above a given target figure. Prices are allowed to increase gradually and some unemployment is tolerated.

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Origins

An early form of NAIRU is found in the work of Abba P. Lerner (Lerner 1951, Chapter 14), who referred to it as “low full employment” attained via the expansion of aggregate demand, in contrast with the “high full employment” which adds incomes policies (wage and price controls) to demand stimulation.

The concept arose in the wake of the popularity of the Phillips curve which summarized the observed negative correlation between the rate of unemployment and the rate of inflation (measured as annual nominal wage growth of employees) for number of industrialised countries with more or less mixed economies. This correlation (previously seen for the U.S. by Irving Fisher) persuaded some analysts that it was impossible for governments simultaneously to target both arbitrarily low unemployment and price stability, and that, therefore, it was government’s role to seek a point on the trade-off between unemployment and inflation which matched a domestic social consensus.

During the 1970s in the United States and several other industrialized countries, Phillips curve analysis became less popular, because inflation rose at the same time that unemployment rose (see stagflation).

Worse, as far as many economists were concerned, was that the Phillips curve had little or no theoretical basis. Critics of this analysis (such as Milton Friedman and Edmund Phelps) argued that the Phillips curve could not be a fundamental characteristic of economic general equilibrium because it showed a correlation between a real economic variable (the unemployment rate) and a nominal economic variable (the inflation rate). Their counter-analysis was that government macroeconomic policy (primarily monetary policy) was being driven by a low unemployment target and that this caused expectations of inflation to change, so that steadily accelerating inflation rather than reduced unemployment was the result. The resulting prescription was that government economic policy (or at least monetary policy) should not be influenced by any level of unemployment below a critical level – the “natural rate” or NAIRU.[6]

The natural rate hypothesis

The idea behind the natural rate hypothesis put forward by Friedman was that any given labor market structure must involve a certain amount of unemployment, including frictional unemployment associated with individuals changing jobs and possibly classical unemployment arising from real wages being held above the market-clearing level by minimum wage laws, trade unions or other labour market institutions. Unexpected inflation might allow unemployment to fall below the natural rate by temporarily depressing real wages, but this effect would dissipate once expectations about inflation were corrected. Only with continuously accelerating inflation could rates of unemployment below the natural rate be maintained.

The analysis supporting the natural rate hypothesis was controversial, and empirical evidence suggested that the natural rate varied over time in ways that could not easily be explained by changes in labor market structures. As a result, the “natural rate” terminology was largely supplanted by that of the NAIRU, which referred to a rate of unemployment below which inflation would accelerate, but did not imply a commitment to any particular theoretical explanation, or a prediction that the rate would be stable over time.

Properties

If {\displaystyle U*} is the NAIRU and {\displaystyle U} is the actual unemployment rate, the theory says that:

if {\displaystyle U<U*} for a few years, inflationary expectations rise, so that the inflation rate tends to increase;

if {\displaystyle U>U*} for a few years, inflationary expectations fall, so that the inflation rate tends to slow (there is disinflation); and

if {\displaystyle U=U*}, the inflation rate tends to stay the same, unless there is an exogenous shock.

Okun’s law can be stated as saying that for every one percentage point by which the actual unemployment rate exceeds the so-called “natural” rate of unemployment, real gross domestic product is reduced by 2% to 3%.

Criticism

The NAIRU analysis assumes that if inflation increases, workers and employers can create contracts that take into account expectations of higher inflation and agree on a level of wage inflation that matches the expected level of price inflation to maintain constant real wages. Therefore, the analysis requires inflation to accelerate to maintain low unemployment. However, this argument implicitly assumes that workers and employers cannot contract to incorporate accelerating inflation into wage expectations, but there is no clear justification for assuming that expectations or contract structures are limited in this way aside from the fact that such wage arrangements are not commonly observed.

The NAIRU analysis is especially problematic if the Phillips curve displays hysteresis, that is, if episodes of high unemployment raise the NAIRU.[7] This could happen, for example, if unemployed workers lose skills so that employers prefer to bid up of the wages of existing workers when demand increases, rather than hiring the unemployed.

Others, such as Abba Lerner (1951, 1967) and Hyman Minsky (1965) have argued that a similar effect can be achieved without the human costs of unemployment via a job guarantee, where rather than being unemployed, those who cannot find work in the private sector should be employed by the government. This theory, and the policy of the job guarantee replaces the NAIRU with the NAIBER (non-accelerating-inflation-buffer employment ratio).[8]

Relationship to other economic theories

Most economists do not see the NAIRU theory as explaining all inflation. Instead, it is possible to move along a short run Phillips Curve (even though the NAIRU theory says that this curve shifts in the longer run) so that unemployment can rise or fall due to changes in inflation. Exogenous supply-shock inflation is also possible, as with the “energy crises” of the 1970s or the credit crunch of the early 21st century.

The NAIRU theory was mainly intended as an argument against active Keynesian demand management and in favor of free markets (at least on the macroeconomic level). There is, for instance, no theoretical basis for predicting the NAIRU. Monetarists instead support the generalized assertion that the correct approach to unemployment is through microeconomic measures (to lower the NAIRU whatever its exact level), rather than macroeconomic activity based on an estimate of the NAIRU in relation to the actual level of unemployment. Monetary policy, they maintain, should aim instead at stabilizing the inflation rate.

Naming

The NAIRU, non-accelerating inflation rate of unemployment, is actually misnamed. It is the price level that is accelerating (or decelerating), not the inflation rate. The inflation rate is just changing, not accelerating.[9]

The Phillips curve is a single-equation empirical model, named after A. W. Phillips, describing a historical inverse relationship between rates of unemployment and corresponding rates of inflation that result within an economy. Stated simply, decreased unemployment, (i.e., increased levels of employment) in an economy will correlate with higher rates of inflation.

While there is a short run tradeoff between unemployment and inflation, it has not been observed in the long run.[1] In 1968, Milton Friedman asserted that the Phillips curve was only applicable in the short-run and that in the long-run, inflationary policies will not decrease unemployment.[2][3] Friedman then correctly predicted that, in the 1973–75 recession, both inflation and unemployment would increase.[3] The long-run Phillips curve is now seen as a vertical line at the natural rate of unemployment, where the rate of inflation has no effect on unemployment.[4] Accordingly, the Phillips curve is now seen as too simplistic, with the unemployment rate supplanted by more accurate predictors of inflation based on velocity of moneysupply measures such as the MZM (“money zero maturity”) velocity,[5] which is affected by unemployment in the short but not the long term.[6]

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History

Rate of Change of Wages against Unemployment, United Kingdom 1913–1948 from Phillips (1958)

William Phillips, a New Zealand born economist, wrote a paper in 1958 titled The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957, which was published in the quarterly journal Economica.[7] In the paper Phillips describes how he observed an inverse relationship between money wage changes and unemployment in the British economy over the period examined. Similar patterns were found in other countries and in 1960 Paul Samuelson and Robert Solow took Phillips’ work and made explicit the link between inflation and unemployment: when inflation was high, unemployment was low, and vice versa.[8]

In the 1920s, an American economist Irving Fisher noted this kind of Phillips curve relationship. However, Phillips’ original curve described the behavior of money wages.[9]

In the years following Phillips’ 1958 paper, many economists in the advanced industrial countries believed that his results showed that there was a permanently stable relationship between inflation and unemployment.[citation needed] One implication of this for government policy was that governments could control unemployment and inflation with a Keynesian policy. They could tolerate a reasonably high rate of inflation as this would lead to lower unemployment – there would be a trade-off between inflation and unemployment. For example, monetary policy and/or fiscal policy could be used to stimulate the economy, raising gross domestic product and lowering the unemployment rate. Moving along the Phillips curve, this would lead to a higher inflation rate, the cost of enjoying lower unemployment rates.[citation needed] Economist James Forder argues that this view is historically false and that neither economists nor governments took that view and that the ‘Phillips curve myth’ was an invention of the 1970s.[10]

Stagflation

In the 1970s, many countries experienced high levels of both inflation and unemployment also known as stagflation. Theories based on the Phillips curve suggested that this could not happen, and the curve came under a concerted attack from a group of economists headed by Milton Friedman.[citation needed] Friedman argued that the Phillips curve relationship was only a short-run phenomenon. In this he followed eight years after Samuelson and Solow [1960] who wrote ” All of our discussion has been phrased in short-run terms, dealing with what might happen in the next few years. It would be wrong, though, to think that our Figure 2 menu that related obtainable price and unemployment behavior will maintain its same shape in the longer run. What we do in a policy way during the next few years might cause it to shift in a definite way.”[8] As Samuelson and Solow had argued 8 years earlier, he argued that in the long run, workers and employers will take inflation into account, resulting in employment contracts that increase pay at rates near anticipated inflation. Unemployment would then begin to rise back to its previous level, but now with higher inflation rates. This result implies that over the longer-run there is no trade-off between inflation and unemployment. This implication is significant for practical reasons because it implies that central banks should not set employment targets above the natural rate.[1]

More recent research has shown that there is a moderate trade-off between low-levels of inflation and unemployment. Work by George Akerlof, William Dickens, and George Perry,[12]implies that if inflation is reduced from two to zero percent, unemployment will be permanently increased by 1.5 percent. This is because workers generally have a higher tolerance for real wage cuts than nominal ones. For example, a worker will more likely accept a wage increase of two percent when inflation is three percent, than a wage cut of one percent when the inflation rate is zero.

Today

U.S. Inflation and Unemployment 1/2000 to 4/2013

Most economists no longer use the Phillips curve in its original form because it was shown to be too simplistic.[6] This can be seen in a cursory analysis of US inflation and unemployment data from 1953–92. There is no single curve that will fit the data, but there are three rough aggregations—1955–71, 1974–84, and 1985–92—each of which shows a general, downwards slope, but at three very different levels with the shifts occurring abruptly. The data for 1953–54 and 1972–73 do not group easily, and a more formal analysis posits up to five groups/curves over the period.[1]

But still today, modified forms of the Phillips Curve that take inflationary expectations into account remain influential. The theory goes under several names, with some variation in its details, but all modern versions distinguish between short-run and long-run effects on unemployment. Modern Phillips curve models include both a short-run Phillips Curve and a long-run Phillips Curve. This is because in the short run, there is generally an inverse relationship between inflation and the unemployment rate; as illustrated in the downward sloping short-run Phillips curve. In the long run, that relationship breaks down and the economy eventually returns to the natural rate of unemployment regardless of the inflation rate.[13]

The “short-run Phillips curve” is also called the “expectations-augmented Phillips curve”, since it shifts up when inflationary expectations rise, Edmund Phelps and Milton Friedman argued. In the long run, this implies that monetary policy cannot affect unemployment, which adjusts back to its “natural rate“, also called the “NAIRU” or “long-run Phillips curve”. However, this long-run “neutrality” of monetary policy does allow for short run fluctuations and the ability of the monetary authority to temporarily decrease unemployment by increasing permanent inflation, and vice versa. The popular textbook of Blanchard gives a textbook presentation of the expectations-augmented Phillips curve.[14]

An equation like the expectations-augmented Phillips curve also appears in many recent New Keynesiandynamic stochastic general equilibrium models. In these macroeconomic models with sticky prices, there is a positive relation between the rate of inflation and the level of demand, and therefore a negative relation between the rate of inflation and the rate of unemployment. This relationship is often called the “New Keynesian Phillips curve.” Like the expectations-augmented Phillips curve, the New Keynesian Phillips curve implies that increased inflation can lower unemployment temporarily, but cannot lower it permanently. Two influential papers that incorporate a New Keynesian Phillips curve are Clarida, Galí, and Gertler (1999),[15] and Blanchard and Galí (2007).[16]

Mathematics

There are at least two different mathematical derivations of the Phillips curve. First, there is the traditional or Keynesian version. Then, there is the new Classical version associated with Robert E. Lucas, Jr.

The traditional Phillips curve

The original Phillips curve literature was not based on the unaided application of economic theory. Instead, it was based on empirical generalizations. After that, economists tried to develop theories that fit the data.

Money wage determination

The traditional Phillips curve story starts with a wage Phillips Curve, of the sort described by A.W. Phillips himself. This describes the rate of growth of money wages (gW). Here and below, the operator g is the equivalent of “the percentage rate of growth of” the variable that follows.

{\displaystyle gW=gW^{T}-f(U)}

The “money wage rate” (W) is shorthand for total money wage costs per production employee, including benefits and payroll taxes. The focus is on only production workers’ money wages, because (as discussed below) these costs are crucial to pricing decisions by the firms.

This equation tells us that the growth of money wages rises with the trend rate of growth of money wages (indicated by the superscript “T”) and falls with the unemployment rate (U). The function f() is assumed to be monotonically increasing with U so that the dampening of money-wage increases by unemployment is shown by the negative sign in the equation above.

There are several possible stories behind this equation. A major one is that money wages are set by bilateral negotiations under partial bilateral monopoly: as the unemployment rate rises, all else constant worker bargaining power falls, so that workers are less able to increase their wages in the face of employer resistance.

During the 1970s, this story had to be modified, because (as the late Abba Lerner had suggested in the 1940s) workers try to keep up with inflation. Since the 1970s, the equation has been changed to introduce the role of inflationary expectations (or the expected inflation rate, gPex). This produces the expectations-augmented wage Phillips curve:

{\displaystyle gW=gW^{T}-f(U)+\lambda .gP^{ex}.}

The introduction of inflationary expectations into the equation implies that actual inflation can feed back into inflationary expectations and thus cause further inflation. The late economist James Tobin dubbed the last term “inflationary inertia,” because in the current period, inflation exists which represents an inflationary impulse left over from the past.

It also involved much more than expectations, including the price-wage spiral. In this spiral, employers try to protect profits by raising their prices and employees try to keep up with inflation to protect their real wages. This process can feed on itself, becoming a self-fulfilling prophecy.

The parameter λ (which is presumed constant during any time period) represents the degree to which employees can gain money wage increases to keep up with expected inflation, preventing a fall in expected real wages. It is usually assumed that this parameter equals unity in the long run.

In addition, the function f() was modified to introduce the idea of the Non-Accelerating Inflation Rate of Unemployment (NAIRU) or what’s sometimes called the “natural” rate of unemployment or the inflation-threshold unemployment rate:

[1] gW = gWT – f(U − U*) + λ·gPex.

Here, U* is the NAIRU. As discussed below, if U < U*, inflation tends to accelerate. Similarly, if U > U*, inflation tends to slow. It is assumed that f(0) = 0, so that when U = U*, the f term drops out of the equation.

In equation [1], the roles of gWT and gPex seem to be redundant, playing much the same role. However, assuming that λ is equal to unity, it can be seen that they are not. If the trend rate of growth of money wages equals zero, then the case where U equals U* implies that gW equals expected inflation. That is, expected real wages are constant.

In any reasonable economy, however, having constant expected real wages could only be consistent with actual real wages that are constant over the long haul. This does not fit with economic experience in the U.S. or any other major industrial country. Even though real wages have not risen much in recent years, there have been important increases over the decades.

An alternative is to assume that the trend rate of growth of money wages equals the trend rate of growth of average labor productivity (Z). That is:

[2] gWT = gZT.

Under assumption [2], when U equals U* and λ equals unity, expected real wages would increase with labor productivity. This would be consistent with an economy in which actual real wages increase with labor productivity. Deviations of real-wage trends from those of labor productivity might be explained by reference to other variables in the model.

Pricing decisions

Next, there is price behavior. The standard assumption is that markets are imperfectly competitive, where most businesses have some power to set prices. So the model assumes that the average business sets a unit price (P) as a mark-up (M) over the unit labor cost in production measured at a standard rate of capacity utilization (say, at 90 percent use of plant and equipment) and then adds in the unit materials cost.

The standardization involves later ignoring deviations from the trend in labor productivity. For example, assume that the growth of labor productivity is the same as that in the trend and that current productivity equals its trend value:

gZ = gZT and Z = ZT.

The markup reflects both the firm’s degree of market power and the extent to which overhead costs have to be paid. Put another way, all else equal, M rises with the firm’s power to set prices or with a rise of overhead costs relative to total costs.

So pricing follows this equation:

P = M × (unit labor cost) + (unit materials cost)

= M × (total production employment cost)/(quantity of output) + UMC.

UMC is unit raw materials cost (total raw materials costs divided by total output). So the equation can be restated as:

Then, combined with the wage Phillips curve [equation 1] and the assumption made above about the trend behavior of money wages [equation 2], this price-inflation equation gives us a simple expectations-augmented price Phillips curve:

gP = −f(U − U*) + λ·gPex.

Some assume that we can simply add in gUMC, the rate of growth of UMC, in order to represent the role of supply shocks (of the sort that plagued the U.S. during the 1970s). This produces a standard short-term Phillips curve:

gP = −f(U − U*) + λ·gPex + gUMC.

Economist Robert J. Gordon has called this the “Triangle Model” because it explains short-run inflationary behavior by three factors: demand inflation (due to low unemployment), supply-shock inflation (gUMC), and inflationary expectations or inertial inflation.

In the long run, it is assumed, inflationary expectations catch up with and equal actual inflation so that gP = gPex. This represents the long-term equilibrium of expectations adjustment. Part of this adjustment may involve the adaptation of expectations to the experience with actual inflation. Another might involve guesses made by people in the economy based on other evidence. (The latter idea gave us the notion of so-called rational expectations.)

Expectational equilibrium gives us the long-term Phillips curve. First, with λ less than unity:

gP = [1/(1 − λ)]·(−f(U − U*) + gUMC).

This is nothing but a steeper version of the short-run Phillips curve above. Inflation rises as unemployment falls, while this connection is stronger. That is, a low unemployment rate (less than U*) will be associated with a higher inflation rate in the long run than in the short run. This occurs because the actual higher-inflation situation seen in the short run feeds back to raise inflationary expectations, which in turn raises the inflation rate further. Similarly, at high unemployment rates (greater than U*) lead to low inflation rates. These in turn encourage lower inflationary expectations, so that inflation itself drops again.

This logic goes further if λ is equal to unity, i.e., if workers are able to protect their wages completely from expected inflation, even in the short run. Now, the Triangle Model equation becomes:

– f(U − U*) = gUMC.

If we further assume (as seems reasonable) that there are no long-term supply shocks, this can be simplified to become:

−f(U − U*) = 0 which implies that U = U*.

All of the assumptions imply that in the long run, there is only one possible unemployment rate, U* at any one time. This uniqueness explains why some call this unemployment rate “natural.”

To truly understand and criticize the uniqueness of U*, a more sophisticated and realistic model is needed. For example, we might introduce the idea that workers in different sectors push for money wage increases that are similar to those in other sectors. Or we might make the model even more realistic. One important place to look is at the determination of the mark-up, M.

New classical version

The Phillips curve equation can be derived from the (short-run) Lucas aggregate supply function. The Lucas approach is very different from that the traditional view. Instead of starting with empirical data, he started with a classical economic model following very simple economic principles.

where Y is log value of the actual output, Yn is log value of the “natural” level of output, a is a positive constant, P is log value of the actual price level, and Pe is log value of the expected price level. Lucas assumes that Yn has a unique value.

Note that this equation indicates that when expectations of future inflation (or, more correctly, the future price level) are totally accurate, the last term drops out, so that actual output equals the so-called “natural” level of real GDP. This means that in the Lucas aggregate supply curve, the only reason why actual real GDP should deviate from potential—and the actual unemployment rate should deviate from the “natural” rate—is because of incorrect expectations of what is going to happen with prices in the future. (The idea has been expressed first by Keynes, General Theory, Chapter 20 section III paragraph 4).

This differs from other views of the Phillips curve, in which the failure to attain the “natural” level of output can be due to the imperfection or incompleteness of markets, the stickiness of prices, and the like. In the non-Lucas view, incorrect expectations can contribute to aggregate demand failure, but they are not the only cause. To the “new Classical” followers of Lucas, markets are presumed to be perfect and always attain equilibrium (given inflationary expectations).

We re-arrange the equation into:

{\displaystyle P=P_{e}+{\frac {Y-Y_{n}}{a}}}

Next we add unexpected exogenous shocks to the world supply v:

{\displaystyle P=P_{e}+{\frac {Y-Y_{n}}{a}}+v}

Subtracting last year’s price levels P−1 will give us inflation rates, because

This equation, plotting inflation rate π against unemployment U gives the downward-sloping curve in the diagram that characterises the Phillips curve.

New Keynesian version

The New Keynesian Phillips curve was originally derived by Roberts in 1995,[17] and since been used in most state-of-the-art New Keynesian DSGE models like the one of Clarida, Galí, and Gertler (2000).[18][19]

NAIRU and rational expectations

Short-Run Phillips Curve before and after Expansionary Policy, with Long-Run Phillips Curve (NAIRU)

In the 1970s, new theories, such as rational expectations and the NAIRU (non-accelerating inflation rate of unemployment) arose to explain how stagflation could occur. The latter theory, also known as the “natural rate of unemployment“, distinguished between the “short-term” Phillips curve and the “long-term” one. The short-term Phillips Curve looked like a normal Phillips Curve, but shifted in the long run as expectations changed. In the long run, only a single rate of unemployment (the NAIRU or “natural” rate) was consistent with a stable inflation rate. The long-run Phillips Curve was thus vertical, so there was no trade-off between inflation and unemployment. Edmund Phelps won the Nobel Prize in Economics in 2006 in part for this. However, the expectations argument was in fact very widely understood before his work on it.[20]

In the diagram, the long-run Phillips curve is the vertical red line. The NAIRU theory says that when unemployment is at the rate defined by this line, inflation will be stable. However, in the short-run policymakers will face an inflation-unemployment rate tradeoff marked by the “Initial Short-Run Phillips Curve” in the graph. Policymakers can therefore reduce the unemployment rate temporarily, moving from point A to point B through expansionary policy. However, according to the NAIRU, exploiting this short-run tradeoff will raise inflation expectations, shifting the short-run curve rightward to the “New Short-Run Phillips Curve” and moving the point of equilibrium from B to C. Thus the reduction in unemployment below the “Natural Rate” will be temporary, and lead only to higher inflation in the long run.

Since the short-run curve shifts outward due to the attempt to reduce unemployment, the expansionary policy ultimately worsens the exploitable tradeoff between unemployment and inflation. That is, it results in more inflation at each short-run unemployment rate. The name “NAIRU” arises because with actual unemployment below it, inflation accelerates, while with unemployment above it, inflation decelerates. With the actual rate equal to it, inflation is stable, neither accelerating nor decelerating. One practical use of this model was to provide an explanation for stagflation, which confounded the traditional Phillips curve.

The rational expectations theory said that expectations of inflation were equal to what actually happened, with some minor and temporary errors. This in turn suggested that the short-run period was so short that it was non-existent: any effort to reduce unemployment below the NAIRU, for example, would immediately cause inflationary expectations to rise and thus imply that the policy would fail. Unemployment would never deviate from the NAIRU except due to random and transitory mistakes in developing expectations about future inflation rates. In this perspective, any deviation of the actual unemployment rate from the NAIRU was an illusion.

However, in the 1990s in the U.S., it became increasingly clear that the NAIRU did not have a unique equilibrium and could change in unpredictable ways. In the late 1990s, the actual unemployment rate fell below 4% of the labor force, much lower than almost all estimates of the NAIRU. But inflation stayed very moderate rather than accelerating. So, just as the Phillips curve had become a subject of debate, so did the NAIRU.

Furthermore, the concept of rational expectations had become subject to much doubt when it became clear that the main assumption of models based on it was that there exists a single (unique) equilibrium in the economy that is set ahead of time, determined independently of demand conditions. The experience of the 1990s suggests that this assumption cannot be sustained.

The Phillips curve started as an empirical observation in search of a theoretical explanation.[citation needed] Specifically, the Phillips curve tried to determine whether the inflation-unemployment link was causal or simply correlational. There are several major explanations of the short-term Phillips curve regularity.

To Milton Friedman there is a short-term correlation between inflation shocks and employment. When an inflationary surprise occurs, workers are fooled into accepting lower pay because they do not see the fall in real wages right away. Firms hire them because they see the inflation as allowing higher profits for given nominal wages. This is a movement along the Phillips curve as with change A. Eventually, workers discover that real wages have fallen, so they push for higher money wages. This causes the Phillips curve to shift upward and to the right, as with B. Some research underlines that some implicit and serious assumptions are actually in the background of the Friedmanian Phillips curve. This information asymmetry and a special pattern of flexibility of prices and wages are both necessary if one wants to maintain the mechanism told by Friedman. However, as it is argued, these presumptions remain completely unrevealed and theoretically ungrounded by Friedman.[21]

Economists such as Milton Friedman and Edmund Phelps reject this theory because it implies that workers suffer from money illusion. According to them, rational workers would only react to real wages, that is, inflation adjusted wages. However, one of the characteristics of a modern industrial economy is that workers do not encounter their employers in an atomized and perfect market. They operate in a complex combination of imperfect markets, monopolies, monopsonies, labor unions, and other institutions. In many cases, they may lack the bargaining power to act on their expectations, no matter how rational they are, or their perceptions, no matter how free of money illusion they are. It is not that high inflation causes low unemployment (as in Milton Friedman’s theory) as much as vice versa: Low unemployment raises worker bargaining power, allowing them to successfully push for higher nominal wages. To protect profits, employers raise prices.

Similarly, built-in inflation is not simply a matter of subjective “inflationary expectations” but also reflects the fact that high inflation can gather momentum and continue beyond the time when it was started, due to the objective price/wage spiral.

However, other economists, like Jeffrey Herbener, argue that price is market-determined and competitive firms cannot simply raise prices.[citation needed] They reject the Phillips curve entirely, concluding that unemployment’s influence is only a small portion of a much larger inflation picture that includes prices of raw materials, intermediate goods, cost of raising capital, worker productivity, land, and other factors.

The last reflects inflationary expectations and the price/wage spiral. Supply shocks and changes in built-in inflation are the main factors shifting the short-run Phillips Curve and changing the trade-off. In this theory, it is not only inflationary expectations that can cause stagflation. For example, the steep climb of oil prices during the 1970s could have this result.

Changes in built-in inflation follow the partial-adjustment logic behind most theories of the NAIRU:

Low unemployment encourages high inflation, as with the simple Phillips curve. But if unemployment stays low and inflation stays high for a long time, as in the late 1960s in the U.S., both inflationary expectations and the price/wage spiral accelerate. This shifts the short-run Phillips curve upward and rightward, so that more inflation is seen at any given unemployment rate. (This is with shift B in the diagram.)

High unemployment encourages low inflation, again as with a simple Phillips curve. But if unemployment stays high and inflation stays low for a long time, as in the early 1980s in the U.S., both inflationary expectations and the price/wage spiral slow. This shifts the short-run Phillips curve downward and leftward, so that less inflation is seen at each unemployment rate.

In between these two lies the NAIRU, where the Phillips curve does not have any inherent tendency to shift, so that the inflation rate is stable. However, there seems to be a range in the middle between “high” and “low” where built-in inflation stays stable. The ends of this “non-accelerating inflation range of unemployment rates” change over time.

Joke article

In 2008, Gregor Smith published a joke article in the prestigious Journal of Money, Credit and Banking titled “Japan’s Phillips Curve Looks Like Japan”. This article points out the uncanny resemblance between Japan’s Phillips curve and the country’s geographic shape.[22]

Jump up^Forder, James (2010). “The historical place of the ‘Friedman-Phelps’ expectations critique”. European Journal of the History of Economic Thought. 17 (3): 493–511. doi:10.1080/09672560903114875.

Milton Friedman’s works include many monographs, books, scholarly articles, papers, magazine columns, television programs, and lectures, and cover a broad range of economic topics and public policy issues. His books and essays have had an international influence, including in former communist states.[18][19][20][21] A survey of economists ranked Friedman as the second-most popular economist of the twentieth century after John Maynard Keynes,[22] and The Economist described him as “the most influential economist of the second half of the 20th century … possibly of all of it”.[23]

Contents

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Early life

Friedman was born in Brooklyn, New York on July 31, 1912. His parents, Sára Ethel (née Landau) and Jenő Saul Friedman,[24] were Jewish immigrants from Beregszász in Carpathian Ruthenia, Kingdom of Hungary (now Berehove in Ukraine). They both worked as dry goods merchants. Shortly after Milton’s birth, the family relocated to Rahway, New Jersey. In his early teens, Friedman was injured in a car accident, which scarred his upper lip.[25] A talented student, Friedman graduated from Rahway High School in 1928, just before his 16th birthday.[26][27]

In 1932, Friedman graduated from Rutgers University, where he specialized in mathematics and economics and initially intended to become an actuary. During his time at Rutgers, Friedman became influenced by two economics professors, Arthur F. Burns and Homer Jones, who convinced him that modern economics could help end the Great Depression.

During 1935, he began work for the National Resources Committee, which was then working on a large consumer budget survey. Ideas from this project later became a part of his Theory of the Consumption Function. Friedman began employment with the National Bureau of Economic Research during autumn 1937 to assist Simon Kuznets in his work on professional income. This work resulted in their jointly authored publication Incomes from Independent Professional Practice, which introduced the concepts of permanent and transitory income, a major component of the Permanent Income Hypothesis that Friedman worked out in greater detail in the 1950s. The book hypothesizes that professional licensing artificially restricts the supply of services and raises prices.

During 1940, Friedman was appointed an assistant professor teaching Economics at the University of Wisconsin–Madison, but encountered antisemitism in the Economics department and decided to return to government service.[34][35] From 1941 to 1943 Friedman worked on wartime tax policy for the Federal Government, as an advisor to senior officials of the United States Department of the Treasury. As a Treasury spokesman during 1942 he advocated a Keynesian policy of taxation. He helped to invent the payroll withholding tax system, since the federal government badly needed money in order to fight the war.[36] He later said, “I have no apologies for it, but I really wish we hadn’t found it necessary and I wish there were some way of abolishing withholding now.”[37]

Academic career

Early years

In 1940, Friedman accepted a position at the University of Wisconsin–Madison, but left because of differences with faculty regarding United States involvement in World War II. Friedman believed the United States should enter the war.[38] In 1943, Friedman joined the Division of War Research at Columbia University (headed by W. Allen Wallis and Harold Hotelling), where he spent the rest of World War II working as a mathematical statistician, focusing on problems of weapons design, military tactics, and metallurgical experiments.[38][39]

In 1945, Friedman submitted Incomes from Independent Professional Practice (co-authored with Kuznets and completed during 1940) to Columbia as his doctoral dissertation. The university awarded him a PhD in 1946. Friedman spent the 1945–1946 academic year teaching at the University of Minnesota (where his friend George Stigler was employed). On February 12, 1945, his son, David D. Friedman was born.

University of Chicago

In 1946, Friedman accepted an offer to teach economic theory at the University of Chicago (a position opened by departure of his former professor Jacob Viner to Princeton University). Friedman would work for the University of Chicago for the next 30 years. There he contributed to the establishment of an intellectual community that produced a number of Nobel Prize winners, known collectively as the Chicago school of economics.

At that time, Arthur F. Burns, who was then the head of the National Bureau of Economic Research, asked Friedman to rejoin the Bureau’s staff. He accepted the invitation, and assumed responsibility for the Bureau’s inquiry into the role of money in the business cycle. As a result, he initiated the “Workshop in Money and Banking” (the “Chicago Workshop”), which promoted a revival of monetary studies. During the latter half of the 1940s, Friedman began a collaboration with Anna Schwartz, an economic historian at the Bureau, that would ultimately result in the 1963 publication of a book co-authored by Friedman and Schwartz, A Monetary History of the United States, 1867–1960.

Friedman spent the 1954–1955 academic year as a Fulbright Visiting Fellow at Gonville and Caius College, Cambridge. At the time, the Cambridge economics faculty was divided into a Keynesian majority (including Joan Robinson and Richard Kahn) and an anti-Keynesian minority (headed by Dennis Robertson). Friedman speculated that he was invited to the fellowship, because his views were unacceptable to both of the Cambridge factions. Later his weekly columns for Newsweek magazine (1966–84) were well read and increasingly influential among political and business people.[40] From 1968 to 1978, he and Paul Samuelson participated in the Economics Cassette Series, a biweekly subscription series where the economist would discuss the days’ issues for about a half-hour at a time.[41][42]

Friedman was an economic adviser to Republican presidential candidate Barry Goldwater during 1964.

Personal life

Retirement

In 1977, at the age of 65, Friedman retired from the University of Chicago after teaching there for 30 years. He and his wife moved to San Francisco where he became a visiting scholar at the Federal Reserve Bank of San Francisco. From 1977 on, he was affiliated with the Hoover Institution at Stanford University. During the same year, Friedman was approached by the Free To Choose Network and asked to create a television program presenting his economic and social philosophy.

The Friedmans worked on this project for the next three years, and during 1980, the ten-part series, titled Free to Choose, was broadcast by the Public Broadcasting Service (PBS). The companion book to the series (co-authored by Milton and his wife, Rose Friedman), also titled Free To Choose, was the bestselling nonfiction book of 1980 and has since been translated into 14 foreign languages.

Friedman served as an unofficial adviser to Ronald Reagan during his 1980 presidential campaign, and then served on the President’s Economic Policy Advisory Board for the rest of the Reagan Administration. Ebenstein says Friedman was “the ‘guru’ of the Reagan administration.”[43] In 1988 he received the National Medal of Science and Reagan honored him with the Presidential Medal of Freedom. Milton Friedman is known now as one of the most influential economists of the 20th century.[44][45] Throughout the 1980s and 1990s, Friedman continued to write editorials and appear on television. He made several visits to Eastern Europe and to China, where he also advised governments. He was also for many years a Trustee of the Philadelphia Society.[46][47][48]

Later life

According to a 2007 article in Commentary magazine, his “parents were moderately observant [Jews], but Friedman, after an intense burst of childhood piety, rejected religion altogether.”[49] He described himself as an agnostic.[50] Friedman wrote extensively of his life and experiences, especially in 1998 in his memoirs with his wife Rose, titled Two Lucky People.

Scholarly contributions

Economics

Friedman was best known for reviving interest in the money supply as a determinant of the nominal value of output, that is, the quantity theory of money. Monetarism is the set of views associated with modern quantity theory. Its origins can be traced back to the 16th-century School of Salamanca or even further; however, Friedman’s contribution is largely responsible for its modern popularization. He co-authored, with Anna Schwartz, A Monetary History of the United States, 1867–1960 (1963), which was an examination of the role of the money supply and economic activity in the U.S. history. A striking conclusion of their research regarded the way in which money supply fluctuations contribute to economic fluctuations. Several regression studies with David Meiselman during the 1960s suggested the primacy of the money supply over investment and government spending in determining consumption and output. These challenged a prevailing, but largely untested, view on their relative importance. Friedman’s empirical research and some theory supported the conclusion that the short-run effect of a change of the money supply was primarily on output but that the longer-run effect was primarily on the price level.

Friedman was the main proponent of the monetarist school of economics. He maintained that there is a close and stable association between inflation and the money supply, mainly that inflation could be avoided with proper regulation of the monetary base’s growth rate. He famously used the analogy of “dropping money out of a helicopter.”,[53] in order to avoid dealing with money injection mechanisms and other factors that would overcomplicate his models.

Friedman’s arguments were designed to counter the popular concept of cost-push inflation, that the increased general price level at the time was the result of increases in the price of oil, or increases in wages; as he wrote,

Friedman rejected the use of fiscal policy as a tool of demand management; and he held that the government’s role in the guidance of the economy should be restricted severely. Friedman wrote extensively on the Great Depression, which he termed the Great Contraction, arguing that it had been caused by an ordinary financial shock whose duration and seriousness were greatly increased by the subsequent contraction of the money supply caused by the misguided policies of the directors of the Federal Reserve.

The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe. Instead of using its powers to offset the depression, it presided over a decline in the quantity of money by one-third from 1929 to 1933 … Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government.

Friedman also argued for the cessation of government intervention in currency markets, thereby spawning an enormous literature on the subject, as well as promoting the practice of freely floating exchange rates. His close friend George Stigler explained, “As is customary in science, he did not win a full victory, in part because research was directed along different lines by the theory of rational expectations, a newer approach developed by Robert Lucas, also at the University of Chicago.”[56] The relationship between Friedman and Lucas, or new classical macroeconomics as a whole, was highly complex. The Friedmanian Phillips curve was an interesting starting point for Lucas, but he soon realized that the solution provided by Friedman was not quite satisfactory. Lucas elaborated a new approach in which rational expectations were presumed instead of the Friedmanian adaptive expectations. Due to this reformulation, the story in which the theory of the new classical Phillips curve was embedded radically changed. This modification, however, had a significant effect on Friedman’s own approach, so, as a result, the theory of the Friedmanian Phillips curve also changed.[57] Moreover, new classical Neil Wallace, who was a graduate student at the University of Chicago between 1960 and 1963, regarded Friedman’s theoretical courses as a mess.[58] This evaluation clearly indicates the broken relationship between Friedmanian monetarism and new classical macroeconomics.

Friedman was also known for his work on the consumption function, the permanent income hypothesis (1957), which Friedman himself referred to as his best scientific work.[59] This work contended that rational consumers would spend a proportional amount of what they perceived to be their permanent income. Windfall gains would mostly be saved. Tax reductions likewise, as rational consumers would predict that taxes would have to increase later to balance public finances. Other important contributions include his critique of the Phillips curve and the concept of the natural rate of unemployment (1968). This critique associated his name, together with that of Edmund Phelps, with the insight that a government that brings about greater inflation cannot permanently reduce unemployment by doing so. Unemployment may be temporarily lower, if the inflation is a surprise, but in the long run unemployment will be determined by the frictions and imperfections of the labor market.

Friedman’s essay “The Methodology of Positive Economics” (1953) provided the epistemological pattern for his own subsequent research and to a degree that of the Chicago School. There he argued that economics as science should be free of value judgments for it to be objective. Moreover, a useful economic theory should be judged not by its descriptive realism but by its simplicity and fruitfulness as an engine of prediction. That is, students should measure the accuracy of its predictions, rather than the ‘soundness of its assumptions’. His argument was part of an ongoing debate among such statisticians as Jerzy Neyman, Leonard Savage, and Ronald Fisher.[60]

Statistics

One of his most famous contributions to statistics is sequential sampling. Friedman did statistical work at the Division of War Research at Columbia, where he and his colleagues came up with the technique. It later became, in the words of The New Palgrave Dictionary of Economics, “the standard analysis of quality control inspection”. The dictionary adds, “Like many of Friedman’s contributions, in retrospect it seems remarkably simple and obvious to apply basic economic ideas to quality control; that however is a measure of his genius.”[61]

Public policy positions

Federal Reserve

Due to its poor performance,[62] Friedman believed that the Federal Reserve Board should be abolished.[63][64] Friedman was deeply critical about Federal Reserve policies, even during the so-called ‘Volcker shock’ that was labelled ‘monetarist.’[65] He further believed that if the money supply was to be centrally controlled (as by the Federal Reserve System) that the preferable way to do it would be with a mechanical system that would keep the quantity of money increasing at a steady rate.

Exchange rates

Friedman was a strong advocate for floating exchange rates throughout the entire Bretton-Woods period. He argued that a flexible exchange rate would make external adjustment possible and allow countries to avoid Balance of Payments crises. He saw fixed exchange rates as an undesirable form of government intervention. The case was articulated in an influential 1953 paper, “The Case for Flexible Exchange Rates”, at a time, when most commentators regarded the possibility of floating exchange rates as a fantasy.[66][67]

School choice

In his 1955 article “The Role of Government in Education”[68] Friedman proposed supplementing publicly operated schools with privately run but publicly funded schools through a system of school vouchers.[69] Reforms similar to those proposed in the article were implemented in, for example, Chile in 1981 and Sweden in 1992.[70] In 1996, Friedman, together with his wife, founded the Friedman Foundation for Educational Choice to advocate school choice and vouchers. In 2016, the Friedman Foundation changed its name to EdChoice to honor the Friedmans’ desire to have the educational choice movement live on without their names attached to it after their deaths.[17]

Conscription

While Walter Oi is credited with establishing the economic basis for a volunteer military, Milton Friedman was a proponent, stating that the draft was “inconsistent with a free society.”[71][72] In Capitalism and Freedom, he argued that conscription is inequitable and arbitrary, preventing young men from shaping their lives as they see fit.[73] During the Nixon administration he headed the committee to research a conversion to paid/volunteer armed force. He would later state that his role in eliminating the conscription in the United States was his proudest accomplishment.[12] Friedman did, however, believe a nation could compel military training as a reserve in case of war time.[73]

Foreign policy

Biographer Lanny Ebenstein noted a drift over time in Friedman’s views from an interventionist to a more cautious foreign policy.[74] He supported US involvement in the Second World War and initially supported a hard line against Communism, but moderated over time.[74] He opposed the Gulf War and the Iraq War.[74] In a spring 2006 interview, Friedman said that the USA’s stature in the world had been eroded by the Iraq War, but that it might be improved if Iraq were to become a peaceful independent country.[75]

Libertarianism and the Republican Party

He served as a member of President Reagan’s Economic Policy Advisory Board starting at 1981. In 1988, he received the Presidential Medal of Freedom and the National Medal of Science. He said that he was a libertarian philosophically, but a member of the U.S. Republican Party for the sake of “expediency” (“I am a libertarian with a small ‘l’ and a Republican with a capital ‘R.’ And I am a Republican with a capital ‘R’ on grounds of expediency, not on principle.”) But, he said, “I think the term classical liberal is also equally applicable. I don’t really care very much what I’m called. I’m much more interested in having people thinking about the ideas, rather than the person.”[76]

Public goods and monopoly

Friedman was supportive of the state provision of some public goods that private businesses are not considered as being able to provide. However, he argued that many of the services performed by government could be performed better by the private sector. Above all, if some public goods are provided by the state, he believed that they should not be a legal monopoly where private competition is prohibited; for example, he wrote:

There is no way to justify our present public monopoly of the post office. It may be argued that the carrying of mail is a technical monopoly and that a government monopoly is the least of evils. Along these lines, one could perhaps justify a government post office, but not the present law, which makes it illegal for anybody else to carry the mail. If the delivery of mail is a technical monopoly, no one else will be able to succeed in competition with the government. If it is not, there is no reason why the government should be engaged in it. The only way to find out is to leave other people free to enter.

Social security, welfare programs, and negative income tax

Friedman proposed that if there had to be a welfare system of any kind, he would replace the existing U.S. welfare system with a negative income tax, a progressive tax system in which the poor receive a basic living income from the government.[78] According to the New York Times, Friedman’s views in this regard were grounded in a belief that while “market forces … accomplish wonderful things”, they “cannot ensure a distribution of income that enables all citizens to meet basic economic needs”.[78]

Drug policy

Friedman also supported libertarian policies such as legalization of drugs and prostitution. During 2005, Friedman and more than 500 other economists advocated discussions regarding the economic benefits of the legalization of marijuana.[79]

Gay rights

Economic freedom

Michael Walker of the Fraser Institute and Friedman hosted a series of conferences from 1986 to 1994. The goal was to create a clear definition of economic freedom and a method for measuring it. Eventually this resulted in the first report on worldwide economic freedom, Economic Freedom in the World.[82] This annual report has since provided data for numerous peer-reviewed studies and has influenced policy in several nations.

Friedman argued for stronger basic legal (constitutional) protection of economic rights and freedoms to further promote industrial-commercial growth and prosperity and buttress democracy and freedom and the rule of law generally in society.[85]

Honors, recognition, and influence

George H. Nash, a leading historian of American conservatism, says that by, “the end of the 1960s he was probably the most highly regarded and influential conservative scholar in the country, and one of the few with an international reputation.”[86] Friedman allowed the libertarian Cato Institute to use his name for its biannual Milton Friedman Prize for Advancing Liberty beginning in 2001. A Friedman Prize was given to the late British economist Peter Bauer in 2002, Peruvian economist Hernando de Soto in 2004, Mart Laar, former Estonian Prime Minister in 2006 and a young Venezuelan student Yon Goicoechea in 2008. His wife Rose, sister of Aaron Director, with whom he initiated the Friedman Foundation for Educational Choice, served on the international selection committee.[87][88] Friedman was also a recipient of the Nobel Prize in Economics.

Upon Friedman’s death, Harvard President Lawrence Summers called him “The Great Liberator” saying “… any honest Democrat will admit that we are now all Friedmanites.” He said Friedman’s great popular contribution was “in convincing people of the importance of allowing free markets to operate.”[89]

In 2013 Stephen Moore, a member of the editorial forward of the Wall Street Journal said, “Quoting the most-revered champion of free-market economics since Adam Smith has become a little like quoting the Bible.” He adds, “There are sometimes multiple and conflicting interpretations.”[90]

Hong Kong

Friedman once said, “If you want to see capitalism in action, go to Hong Kong.”[91] He wrote in 1990 that the Hong Kong economy was perhaps the best example of a free market economy.[92]

One month before his death, he wrote the article “Hong Kong Wrong – What would Cowperthwaite say?” in the Wall Street Journal, criticizing Donald Tsang, the Chief Executive of Hong Kong, for abandoning “positive noninterventionism.”[93] Tsang later said he was merely changing the slogan to “big market, small government,” where small government is defined as less than 20% of GDP. In a debate between Tsang and his rival, Alan Leong, before the 2007 Chief Executive election, Leong introduced the topic and jokingly accused Tsang of angering Friedman to death.

In an April 21, 1975, letter to Pinochet, Friedman considered the “key economic problems of Chile are clearly … inflation and the promotion of a healthy social market economy“.[96] He stated that “There is only one way to end inflation: by drastically reducing the rate of increase of the quantity of money …” and that “… cutting government spending is by far and away the most desirable way to reduce the fiscal deficit, because it … strengthens the private sector thereby laying the foundations for healthy economic growth”.[96] As to how rapidly inflation should be ended, Friedman felt that “for Chile where inflation is raging at 10–20% a month … gradualism is not feasible. It would involve so painful an operation over so long a period that the patient would not survive.” Choosing “a brief period of higher unemployment…” was the lesser evil.. and that “the experience of Germany, … of Brazil …, of the post-war adjustment in the U.S. … all argue for shock treatment“. In the letter Friedman recommended to deliver the shock approach with “… a package to eliminate the surprise and to relieve acute distress” and “… for definiteness let me sketch the contents of a package proposal … to be taken as illustrative” although his knowledge of Chile was “too limited to enable [him] to be precise or comprehensive”. He listed a “sample proposal” of 8 monetary and fiscal measures including “the removal of as many as obstacles as possible that now hinder the private market. For example, suspend … the present law against discharging employees”. He closed, stating “Such a shock program could end inflation in months”. His letter suggested that cutting spending to reduce the fiscal deficit would result in less transitional unemployment than raising taxes.

Sergio de Castro, a Chilean Chicago School graduate, became the nation’s Minister of Finance in 1975. During his six-year tenure, foreign investment increased, restrictions were placed on striking and labor unions, and GDP rose yearly.[97] A foreign exchange program was created between the Catholic University of Chile and the University of Chicago. Many other Chicago School alumni were appointed government posts during and after the Pinochet years; others taught its economic doctrine at Chilean universities. They became known as the Chicago Boys.[98]

Friedman did not criticize Pinochet’s dictatorship at the time, nor the assassinations, illegal imprisonments, torture, or other atrocities that were well known by then.[99] In 1976 Friedman defended his unofficial adviser position with: “I do not consider it as evil for an economist to render technical economic advice to the Chilean Government, any more than I would regard it as evil for a physician to give technical medical advice to the Chilean Government to help end a medical plague.”[100]

Friedman defended his activity in Chile on the grounds that, in his opinion, the adoption of free market policies not only improved the economic situation of Chile but also contributed to the amelioration of Pinochet’s rule and to the eventual transition to a democratic government during 1990. That idea is included in Capitalism and Freedom, in which he declared that economic freedom is not only desirable in itself but is also a necessary condition for political freedom. In his 1980 documentary Free to Choose, he said the following: “Chile is not a politically free system, and I do not condone the system. But the people there are freer than the people in Communist societies because government plays a smaller role. … The conditions of the people in the past few years has been getting better and not worse. They would be still better to get rid of the junta and to be able to have a free democratic system.”[101][102] In 1984, Friedman stated that he has “never refrained from criticizing the political system in Chile.”[95] In 1991 he said: “I have nothing good to say about the political regime that Pinochet imposed. It was a terrible political regime. The real miracle of Chile is not how well it has done economically; the real miracle of Chile is that a military junta was willing to go against its principles and support a free market regime designed by principled believers in a free market. […] In Chile, the drive for political freedom, that was generated by economic freedom and the resulting economic success, ultimately resulted in a referendum that introduced political democracy. Now, at long last, Chile has all three things: political freedom, human freedom and economic freedom. Chile will continue to be an interesting experiment to watch to see whether it can keep all three or whether, now that it has political freedom,that political freedom will tend to be used to destroy or reduce economic freedom.”[103] He stressed that the lectures he gave in Chile were the same lectures he later gave in China and other socialist states.[104]

During the 2000 PBS documentary The Commanding Heights (based on the book), Friedman continued to argue that “free markets would undermine [Pinochet’s] political centralization and political control.”,[105][106] and that criticism over his role in Chile missed his main contention that freer markets resulted in freer people, and that Chile’s unfree economy had caused the military government. Friedman advocated for free markets which undermined “political centralization and political control”.[107]

Iceland

Friedman visited Iceland during the autumn of 1984, met with important Icelanders and gave a lecture at the University of Iceland on the “tyranny of the status quo.” He participated in a lively television debate on August 31, 1984 with socialist intellectuals, including Ólafur Ragnar Grímsson, who later became the president of Iceland.[108] When they complained that a fee was charged for attending his lecture at the University and that, hitherto, lectures by visiting scholars had been free-of-charge, Friedman replied that previous lectures had not been free-of-charge in a meaningful sense: lectures always have related costs. What mattered was whether attendees or non-attendees covered those costs. Friedman thought that it was fairer that only those who attended paid. In this discussion Friedman also stated that he did not receive any money for delivering that lecture.

Estonia

Although Friedman never visited Estonia, his book Free to Choose exercised a great influence on that nation’s then 32-year-old prime minister, Mart Laar, who has claimed that it was the only book on economics he had read before taking office. Laar’s reforms are often credited with responsibility for transforming Estonia from an impoverished Soviet Republic to the “Baltic Tiger.” A prime element of Laar’s program was introduction of the flat tax. Laar won the 2006 Milton Friedman Prize for Advancing Liberty, awarded by the Cato Institute.[109]

United Kingdom

After 1950 Friedman was frequently invited to lecture in Britain, and by the 1970s his ideas had gained widespread attention in conservative circles. For example, he was a regular speaker at the Institute of Economic Affairs (IEA), a libertarian think tank. Conservative politician Margaret Thatcher closely followed IEA programs and ideas, and met Friedman there in 1978. He also strongly influenced Keith Joseph, who became Thatcher’s senior advisor on economic affairs, as well as Alan Walters and Patrick Minford, two other key advisers. Major newspapers, including the Daily Telegraph,The Times, and The Financial Times all promulgated Friedman’s monetarist ideas to British decision-makers. Friedman’s ideas strongly influenced Thatcher and her allies when she became Prime Minister in 1979.[110][111]

Criticism

Econometrician David Hendry criticized part of Friedman’s and Anna Schwartz’s 1982 Monetary Trends.[112] When asked about it during an interview with Icelandic TV in 1984,[113] Friedman said that the criticism referred to a different problem from that which he and Schwartz had tackled, and hence was irrelevant,[114] and pointed out the lack of consequential peer review amongst econometricians on Hendry’s work.[115] In 2006, Hendry said that Friedman was guilty of “serious errors” of misunderstanding that meant “the t-ratios he reported for UK money demand were overstated by nearly 100 per cent”, and said that, in a paper published in 1991 with Neil Ericsson,[116] he had refuted “almost every empirical claim […] made about UK money demand” by Friedman and Schwartz.[117] A 2004 paper updated and confirmed the validity of the Hendry–Ericsson findings through 2000.[118]

Although KeynesianNobel laureatePaul Krugman praised Friedman as a “great economist and a great man” after Friedman’s death in 2006, and acknowledged his many, widely accepted contributions to empirical economics, Krugman had been, and remains, a prominent critic of Friedman. Krugman has written that “he slipped all too easily into claiming both that markets always work and that only markets work. It’s extremely hard to find cases in which Friedman acknowledged the possibility that markets could go wrong, or that government intervention could serve a useful purpose.”[119]

In her book The Shock Doctrine, author and social activist Naomi Klein criticized Friedman’s economic liberalism, identifying it with the principles that guided the economic restructuring that followed the military coups in countries such as Chile and Indonesia. Based on their assessments of the extent to which what she describes as neoliberal policies contributed to income disparities and inequality, both Klein and Noam Chomsky have suggested that the primary role of what they describe as neoliberalism was as an ideological cover for capital accumulation by multinational corporations.[120]

Visit to Chile

Because of his involvement with the Pinochet government, there were international protests when Friedman was awarded the Nobel Prize in 1976.[121] Friedman was accused of supporting the military dictatorship in Chile because of the relation of economists of the University of Chicago to Pinochet, and a controversial six-day trip[122] he took to Chile during March 1975 (less than two years after the coup that deposed President Salvador Allende). Friedman answered that he never was an adviser to the dictatorship, but only gave some lectures and seminars on inflation, and met with officials, including Augusto Pinochet, while in Chile.[123]

Chilean economist Orlando Letelier asserted that Pinochet’s dictatorship resorted to oppression because of popular opposition to Chicago School policies in Chile.[124] After a 1991 speech on drug legalisation, Friedman answered a question on his involvement with the Pinochet regime, saying that he was never an advisor to Pinochet (also mentioned in his 1984 Iceland interview[95]), but that a group of his students at the University of Chicago were involved in Chile’s economic reforms. Friedman credited these reforms with high levels of economic growth and with the establishment of democracy that has subsequently occurred in Chile.[125][126] In October 1988, after returning from a lecture tour of China during which he had met with Zhao Ziyang, Friedman wrote to The Stanford Daily asking if he should anticipate a similar “avalanche of protests for having been willing to give advice to so evil a government? And if not, why not?”[127]

Capitalism and Freedom

Capitalism and Freedom is a seminal work by Friedman. In the book, Friedman talks about the need to move to a classically liberal society, that free markets would help nations and individuals in the long-run and fix the efficiency problems currently faced by the United States and other major countries of the 1950s and 1960s. He goes through the chapters specifying a specific issue in each respective chapter from the role of government and money supply to social welfare programs to a special chapter on occupational licensure. Friedman concludes Capitalism and Freedom with his “classical liberal” stance, that government should stay out of matters that do not need and should only involve itself when absolutely necessary for the survival of its people and the country. He recounts how the best of a country’s abilities come from its free markets while its failures come from government intervention.[77]